M&A Dollar Volumes Drop 80%

Both financial sponsors and strategic acquirers are waiting on the sidelines.
Vincent RyanJanuary 23, 2012

Excepting Apache’s $2.85 billion purchase today and a handful of other transactions, it’s been a horrid start for mergers and acquisitions. While some single-digit billion-dollar deals have closed this year, there have been no blockbusters. And the total volume of deals has fallen drastically from 2011.

As of January 20, 221 deals had been announced in North America, compared with 396 at this point in 2011, according to data provided to by mergermarket. Dollar volume is down 80%, with $24.9 billion in transactions so far this year, compared with $124.6 billion at the same point in 2011.

Last week was even slower than the week before. Forty-one North American acquisitions were announced, down from 63 the week ending January 13.

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“The anecdotal evidence is that companies are driving with two feet — one foot on the accelerator and the other foot ready to hit the brake at any second,” says Howard Johnson, managing director of Veracap Corporate Finance. “People are saying, ‘I know 2008 is going to happen again, so I want to be ready to change direction very quickly when it does and to turn off the taps before any major damage is done.’”

The view from the suites of private-equity fund managers is optimistic, but not overly so. In a survey of more than 100 private-equity firm senior executives released by BDO USA on Monday, 70% of respondents (from all fund sizes) expect to close two to three deals this year. Two to three sounds lethargic, but if these executives follow through, 2012 would be an improvement over 2011. Last year 47% of the responding firms in the survey closed no new deals, and 19% closed only one new deal.

However the activity level shakes out, financial sponsors are focused on bolt-on mergers, according to the BDO USA survey. That could mean fewer transformative deals and smaller transaction sizes overall. During the past 12 months, 13% of firms directed the most capital toward add-ons, compared with 6% in 2010. This year, 95% of firms will at least seek add-on deals, up from 88% last year.

What could slow PE firms down? Half of the executives said 41% to 60% of the value of their next deal would funded by debt. But a blowup in the financial markets or an inordinate rise in the cost of capital could stymie those plans. Problems in Europe are not going away, and the BDO survey found that the largest percentage (45%) of respondents said they expect the cost of capital to increase by up to 200 basis points in the next 12 months.

“While I expect 2012 to be a strong year, I think the level of volatility is going to be dramatic in the M&A market just as it has been in the stock markets,” says Johnson. “Because it won’t take a lot to spook the market.”

For the week ending January 20, the largest transaction was Bristol-Myers Squibb’s announcement of the purchase of Inhibitex, a clinical-stage biopharmaceutical company that focuses on drugs to treat hepatitis C. The transaction is valued at $2.02 billion. In a large PE deal, Blackstone Real Estate Partners bought 46 shopping centers in 20 states from EPN Investment Management. As part of the $1.4 billion transaction, DDR, a manager of commercial real estate portfolios, will take a 5% stake and manage the properties.

Rounding out the top three, Raymond James Financial agreed to buy Morgan Keegan & Co., a securities brokerage, from Regions Financial for $930 million. Raymond James will pay Regions an additional $250 million dividend prior to the deal closing. Regions expects to record an earnings charge of $575 million to $745 million as a result of the transaction.

Amid smaller deals, Apple acquired Anobit Technologies, an Israeli semiconductor company, for $390 million.