CreditSights: M&A Activity Takes A Breather
Merger and acquisition volumes in the second quarter are coming in much lower than the pace that was set in the first quarter, when volumes were boosted by several mega-mergers, particularly in the finance sector. In North America, May volumes are just shy of $78 billion following on from $58 billion worth of deals in April, according to Bloomberg data. This compares to the monthly average of $97 billion that was set in the January to March period. A similar trend is evident in Western Europe. Month-to-date volume in May of $49 billion and an April total of $34.3 billion are much lower than the first quarter average of $69.5 billion.
Despite the expectation of more favorable conditions for deal making in 2004, the notable large deals that printed in the early part of the year have not translated into a consistent pipeline of transactions, making for an extremely competitive environment as regards the M&A advisory business. The waning activity does not necessarily originate in a lack of financing options, despite the low issuance volumes and unsettled conditions in the corporate bond market of late and the lackluster performance of the equity market. Many companies are actually sitting on elevated cash balances after a period of optimal borrowing conditions and as internal cash generation is growing. Also, in the U.S., the Federal Reserve has reported that banks are easing conditions for consumer and investment loans.
What is more likely to be constraining merger activity are the same concerns that are acting as a drag on capital expenditure investments as companies take a conservative approach to opportunities being created by the expanding economy, given their still-high levels of leverage. Further, the macro environment has become more uncertain in recent months as U.S. interest rates rise, oil prices hit multi-year highs and the increased incidence of terrorism raises the risk of exogenous shock. These factors will likely see volumes remain low through June and into the summer despite a flurry of recent announcements.
We continue to expect the M&A transactions that do take place will likely be bolt-on, incremental deals that seek to capitalize on the current economic rebound while adding minimal risk in an already challenging environment.
Analysis by CreditSights, Inc., an independent online credit research platform. Call (212) 340-3888 or visit www.CreditSights.com for more information.
