23 December 2011

Dealmaking amid the debt crisis

The sovereign debt crisis in Europe slowed global dealmaking activity in the second half of 2011 to levels not seen since 2004 but while uncertainty prevails, there are still opportunities for those with the cash.

According to preliminary 2011 data from Zephyr, more than 27,300 deals have been announced globally in H2. This includes M&A, PE and equity fundraising deals. The result is 16 per cent lower than the 32,437 transactions recorded during H1 2011 and, with fewer transactions taking place, total value fell 23 per cent over the timeframe.

The decline is even more marked when isolating the European Union: the value of deals with targets based in the EU fell by more than a third between H1 2011 and H1 2011 after volume slipped by 13 per cent.

“Large strategic M&As with equity raisings and significant debt or leverage have quietened,” said Robin Johnson, City corporate partner at Eversheds.

However, global deal value is falling at a slower rate than volume, which suggests valuations remain strong. Boosted by a robust first half, it looks as though 2011 value will end up being less than 7 per cent down on 2010, despite volume falling at a faster rate of 11 per cent. This shows that those with the cash for M&A are still willing to pay a premium for the companies they believe will help them carry out their strategies. And cash is a particularly important factor, as stock market volatility has reduced the attractiveness of bids containing a share element.

“We may see an increased earn-out usage to bridge gaps between sellers’ expectations and buyers ‘realism’ and appetite, or lack of, for risk,” Johnson said. “Market uncertainty has led to a more conservative valuation culture.”

There was still an appetite for blockbuster M&A deals in 2011; proof came when Capital One Financial agreed to pay more than USD 53 billion for HSBC to help it build a branch network and boost its credit card offering. The top five M&A deals of 2010 were worth a combined USD 184 billion. This will likely stand around 9 per cent lower at USD 167 billion this year – not a bad result given the uncertainty that has characterised the final quarter. What’s more, two of these deals were announced in Q4 and one of them targeted a European company – Switzerland’s Synthes Holding – in December.

Eversheds believes 2012’s growth could come from the mid-market. Johnson said: “We are seeing a very steady flow. Confidence may be fragile but there are off-market deals around. Mid-market companies have cash to burn. A combination of low interest rates, lean working capital and improved business-to-business trading has meant these companies are still pursuing bolt-ons even if there is a lack of new platforms.”

© Zephyr