European Crisis Chills U.S. Deal Making

Except in select industry sectors, merger-and-acquisition activity in North America remained muted this month.

If companies were spending gobs of money on acquisitions, or private-equity firms were making much headway on their mountains of committed capital, the deal counts and dollar volumes of mergers and acquisitions would be way up over last year. But they are not.

May was another slow month for M&A transactions in North America. As of Tuesday, there were 254 deals with a total disclosed value of $88.3 billion for the month, according to data supplied to CFO by mergermarket. That’s a fall of 40% by deal count and 22% by dollar volume.

“In view of concerns about weakening trends in Europe weighing on growth elsewhere, signs of a broader economic recovery may be needed for M&A performance to strengthen,” said Robert W. Baird & Co. analysts in a report released prior to Memorial Day weekend.

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Although CFOs were clearly interested in acquiring as of the first quarter, they are not pulling the trigger on deals. In the March Duke University/CFO Magazine Global Business Outlook Survey, 39% of the 477 CFOs surveyed said they planned to buy in the following 12 months, and 14% planned to sell all or part of their firm. And Deloitte’s first-quarter CFO Signals Survey found that about 20% of CFOs were seeking “transformation deals,” and 50% smaller ones.

Even in the middle market, the segment that has buoyed U.S. merger numbers in the past year, metrics are down, according to Baird. Deal count was off 11% year-to-date as of the end of April, and dollar volume was off 22%.

Strategic acquirers in the middle market are still being conservative with cash. In a survey by the National Middle Market Center, 41% of 1,002 C-suite executives of middle-market companies said an additional $1 of investment would be added to cash holdings or put in liquid financial investments; 11% said they would use it for acquisitions.

Still, some U.S. companies are hungry to expand inorganically. Shipper FedEx, for example, has acquired three companies this year to facilitate expansion in Europe and Latin America. Certain sectors are also humming. As of May 11, energy had the highest amount of U.S. M&A activity measured by dollar volume, $40.1 billion, followed by consumer foods ($17.1 billion), industrial products and services ($12.9 billion), and biotechnology ($12.4 billion), according to mergermarket.

Activity in the energy sector is being aided by a couple of factors. One, private-equity interest in U.S. oil and gas assets is near a 20-year high, according to PricewaterhouseCoopers. “The 10-year low in natural-gas prices has attracted PE as they see opportunity getting in at the bottom and are taking a long-term view of natural-gas pricing,” says Rick Roberge, a principal in PwC’s energy M&A practice.

Two, consolidation in the renewable-energy space is quickening. A recent Ernst & Young report on renewable-energy M&A said there would be further consolidation in the supply chain for solar-energy and wind-energy companies, especially as the United States and Europe cut subsidies for those market segments.

M&A activity tends to stall in the summer, so a sudden burst of deal making in any industry after May is unlikely. But Baird, an investment bank, says if Europe’s crisis does not “short-circuit” financing, “the pieces remain in place for an upturn in the global M&A market.” The positive variables Baird analysts point to are cash-rich corporate balance sheets combined with low prospects for organic growth, pressure on private equity to invest capital, credit-market accessibility, and prospective tax increases following the November elections.