M&A Recovery Stumbles

Will deal-making regain its momentum in the fourth quarter?
Vincent RyanOctober 4, 2011

While mergers and acquisitions have outpaced 2010 in the first nine months of this year, the recently ended third quarter was a slog. A notable slide in M&A activity worldwide and in the United States occurred, says mergermarket, continuing a trend started in the second quarter.

After a robust $293.6 billion worth of deals in the first quarter, activity in the United States dropped to $191.7 billion in the second and $193.6 billion in the third. Global M&A followed the same vector, with the third quarter the lowest of the year at $510.2 billion of deals disclosed. The number of private-equity-backed buyouts also fell in the third quarter, by 23%, according to Preqin, the alternative asset research firm. Financial-sponsor exits from investments also declined.

How long will this continue? Without clear solutions to the Eurozone crisis and a lifting of economic uncertainty in this country, companies may be cautious in moving deals forward. Activity levels over the next four to eight weeks could provide further clues, according to a report from the equity-research department at Keefe, Bruyette & Woods. “The fourth quarter tends to be seasonally strong but a further slowdown in activity from what has been two rather weak months would be increasingly concerning,” KBW analysts write.

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Long term, the outlook for M&A is bullish, due to strong balance sheets, abundant cash earning negative returns, and attractive valuations. “In a slow- to no-growth economic backdrop, we would expect companies to reach for acquisitions as the catalyst for growth,” the KBW report says. Companies in industries that change rapidly and in sectors directly affected by interest rates are the most likely buyers in this kind of climate.

In the meantime, sagging deal numbers are not being helped by a slowdown in large-cap deal flow, says Preqin. While deals over $1 billion have disappeared, transactions valued at less than $250 million are making up a large chunk of activity.

In the past two weeks, North American M&A action has actually rebounded. In the week ending September 30, 45 deals were announced, with a total value of $10.9 billion. The week before, there were 43 deals worth $25.1 billion.

Last week deals above $200 million were scarce, according to data provided to by mergermarket. One of the largest was in financial services: Nationwide Mutual Insurance said it will buy Harleysville Group, a property-and-casualty firm on the East Coast, for $760 million – a premium of 90% based on the target’s closing share price the previous day.

In advertising, Donovan Data Systems and Mediabank LLC merged to form a new company, MediaOcean, in a transaction valued at $485 million. Also in media, U.K. publisher Reed Elsevier agreed to acquire Accuity, a provider of information and technology to financial services, from Bahrain-based Investcorp. Reed paid $526 million in cash.

In cross-border deals, Toyo Seikan Kaisha, a Japanese maker of cans and bottles, agreed to buy Stolle Machinery Co. of Sidney, Ohio, for $775 million. The seller was GSO Capital Partners, a hedge-fund arm of the Blackstone Group.

Finally, Equity One unloaded 36 shopping centers in Florida, other southern states, and Atlanta for $473 million. The buyer was Blackstone Real Estate Partners VII. The shopping centers are 91% occupied, according to Equity One. The company will recognize a net impairment loss of about $32 million in the third quarter as a result of the deal.

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