Strategic Acquirers to Stay Risk-Averse in 2013

Although there will be assets ripe for the picking, many companies will choose to wait out economic uncertainty and resist transformational deals, ...
Vincent RyanDecember 5, 2012

U.S. companies aiming to merge, consolidate, or acquire assets or companies next year are in the minority, and that will make for a sluggish M&A market next year, according to an Ernst & Young report.

“Macroeconomic ambiguity combined with a continued corporate focus on lower risk, organic growth opportunities, and smaller, strategic deals will define deal-making in 2013,” according to E&Y’s 2013 M&A Outlook report, released Wednesday.

Echoing other players in the M&A market, E&Y is forecasting zero growth in deal activity for 2013; volumes will be flat compared with 2012 and remain near a 10-year low.

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This year the number of M&A deals in the United States slumped 10% as of November 26, and total deal value dropped 26%, to $625.7 billion, according to E&Y stats obtained from Thomson Financial. And 2013 will be another year of aversion to large, market-changing moves among managements and boards of directors.

“The current climate is such that uncertainty is indeed freezing decision-making in many companies, in everything from day-to-day operations to more strategic questions like whether to acquire or sell businesses,” says Marc McMorris, co-founder of Carrick Capital Partners, a private-equity firm.

The thirst for M&A among corporate executives declined in the latter half of 2012, according to E&Y’s Capital Confidence Barometer survey. As of October, only 23% of U.S. executives said their company would execute an acquisition next year, down from 34% six months earlier.

But McMorris says there are more-forward thinking, aggressive companies that will use the economic activity and deal-making lull to gain market share. Companies that are the number two, three, or four provider in their market may be thinking this state of suspended decision-making is exactly the pause they needed to jump ahead of the competition, says McMorris.

“We’re seeing lots of conversations around acquisitions where companies are saying it’s exactly the right time to bulk up, expand geographically, or add a new product or service,” he says.

McMorris’s Carrick Capital recently closed its inaugural fund, and like many private-equity firms is poised to invest. Indeed, E&Y says the 2013 outlook for private-equity-sector deals is much more positive, largely because of strong fund-raising by firms and their “confidence in credit availability.”

Private-equity takeovers last year dropped just 1% from 2011, and total deal value increased 3%, to $97.3 billion, according to E&Y. The improvement in private-equity exits (through M&A and initial public offerings) is also an encouraging sign for 2013, especially given private-equity firms’ aging portfolios, says E&Y. Exits increased 13% by number and 21% by dollar volume in 2012.

Sellers’ demands for high premiums have also been holding back M&A. But some business owners may be tired of waiting for a turnaround and choose 2013 as the time to sell at a reasonable premium, McMorris says. Many large companies may also hawk ancillary assets, given the abundance of capital available to private equity and the need to focus their managements on their best-earning businesses. Both situations could be an impetus for acquirers to pounce.

“Many companies are seeing slowing sales and customer deals taking longer to get done, and they are facing a very different growth curve” than high-performing companies, says McMorris. “Particularly in the last quarter or so, companies in that bucket have started to realize they may be in for a slog, and I think you’re starting to see some changes in valuation mentality with that group.”

As to the geographic location of M&A deals, E&Y predicts a rebalancing of private-equity capital allocation globally, given “misgivings about economic growth prospects and inflated pricing in traditional emerging markets like China and India. [That’s] likely to drive PE toward developed markets like the U.S.,” says the E&Y report.