M&A recovery hopes gather pace

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Strip out the mega Verizon-Vodafone deal and European M&A activity year-to-date is at its lowest level since 2009. Hopes are, nevertheless, growing that an improvement in the economic climate and corporate risk-taking will boost deal-making.

This week, five years on from the collapse of Lehman Brothers, deal-makers are once again dreaming of an M&A boom. A combination of improving economic data, rising equity markets and low rates have triggered an upswing in activity.

Company bosses are showing an appetite for deals again and none more so than Lowell McAdam, chairman and chief executive of Verizon Communications, the US telecom company that announced on September 2 it was paying $130 billion for UK rival Vodafone’s 45% stake in their US joint venture Verizon Wireless.

This week, McAdam trumped that by launching a $49 billion US bond deal to finance part of the deal. The deal was the biggest in the history of the bond markets, easily beating the $17 billion record set by Apple in May.

The Verizon acquisition has given the M&A market a shot in the arm. As a result of the deal, announced European M&A activity year-to-date is worth $626.8 billion, according to Dealogic. That beats the $507 billion-worth of deals that were announced in the equivalent period in 2012.

The Verizon deal tops a busy year for deal-making in the telecom sector, which has seen Vodafone offer $10 billion for Kabel Deutschland, and Telefónica paid $11.46 billion for E-Plus, the German mobile business owned by Dutch operator KPN.

There has been activity in other sectors too, such as industrials, where Schneider of France is trying to wrest control of UK rival Invensys.

However, experts warn the spectre of the financial crisis is still weighing on sentiment. A survey from law firm Allen & Overy published this week showed that the value of the global M&A market has slumped 49% below where it was at its peak, while deal volumes have fallen by 18%.

Richard Cranfield, chairman of M&A at Allen & Overy, says: “We have seen a significant contraction in M&A activity post-Lehman as CEO confidence and access to financing have seen a seismic shift.”

While Verizon’s deal is good for market confidence, it might not be a harbinger of a broad-based M&A recovery.

The recovery is uneven and dominated by the US market, where the economy has not been affected by Europe’s sovereign debt woes and where banks have repaired their balance sheets quicker than their counterparts in Europe.

The value of announced US M&A activity year-to-date stands at $839.4 billion, a rise of 41% on the equivalent period last year. By contrast, the value of announced M&A activity across Europe, the Middle East and Africa, is up 23.5% to $626.8 billion. Strip out Verizon’s $130 billion mega-deal and activity is running at its lowest level since the equivalent period in 2009.

Although the economies of the eurozone are improving, the region is not sufficiently strong to encourage corporate executives to take what can be a career-defining or career-shortening move and attempt a transformational acquisition.

“Confidence is the key to M&A, and in the UK and continental Europe that confidence is lacking,” says Cranfield.

Away from the corporate sector, Europe’s private equity firms – the bulwark of the 2007 boom – have money to put to work but cannot find new assets to purchase.

Experts agree that whether the flurry of deals suggest a boom or not, the bottom of the market has been reached and activity is improving. “We’ve seen a pick-up from the summer and I expect that momentum to improve through the autumn,” says one industry source.

Although the US Federal Reserve might announce at its meeting on Wednesday that it will start scaling back or tapering its programme of quantitative easing, financing conditions remain favourable. The source says: “Even if rates rise as we expect, cheap financing is available.” But not for everyone.

Cranfield adds: “Verizon has shown what can be achieved by the debt capital markets but companies with access to debt capital markets form a small proportion of companies which do M&A.”

The encouraging glut of deal activity is a recovery led by the ‘haves’ – big global companies with healthy balance sheets, and access to bank lending and capital markets. The boom times will remain elusive until the ‘have-nots’ start to share McAdam’s confidence.