From a regional perspective, we can see that there was effectively a massive dip in M&A activity throughout Q2 and Q3, which is not much of a surprise to anyone that paid attention to the front page of the newspaper over the course of the year. The majority of the differences between the regional markets is effectively because of the mega-deals that occurred. Specifically, I would say that the US market seems to be off kilter relative to the rest of the world because of the involvement of the government in so many industries and financial institutions. It has taken a lot of time for the system to start working again, and I believe much of the M&A activity has been pushed back further and further as companies have tried to delay the inevitable. One other thing to note is that despite the low absolute levels of activity in the smaller markets such as Latin America, Africa, and the Middle East, there appears to be only a moderate drop-off in activity over the course of the past year. I believe this is partially due to the size of the overall M&A markets and the focus of the regions themselves (operational compared to deal focused).
Following on the previous chart, the one below really highlights to me how much the US makes up in terms of the global M&A market. In some months, the US makes up all if not the vast majority of activity, which is an amazing sight to see. Although a regression cannot be run on those statistics, I would be really curious to see a correlation analysis between US M&A activity and the rest of the world, both as a whole and split country by country. While there would obviously be major differences on a country by country basis due to different regulatory regimes and business cycles, my instinct tells me that the correlation on a US versus global basis would be quite significant. However, I should say that the majority of the activity would be driven by the availability of credit, which is certainly different across markets. Perhaps that is the main reason for the difference in size of the M&A market in the developed and emerging markets.
It should be no surprise to anyone that M&A deal volume was off significantly relative to 2008, as evidenced by the chart below. Effectively no, dealer posted better numbers than 2008, except for Morgan Stanley and Barclays. Goldman moved from 2nd to 1st in the global league tables, taking JP Morgan’s spot. With the markets in turmoil and the BoA / Merrill merger underway, clients clearly did not trust BoA with their M&A activities, which pushed BoA from 3rd last year to 5th. On the face of it, there might not be a lot to take away from this particular graph, however, I would want to see some analysis of how much, historically speaking, deal volume has fallen from its peak, and how long it has taken to reach that peak again, or at least stabilize. If we had access to that information, I think it would give us at least a basis for predicting where the M&A market will head in the future. As we have seen stabilization across the board from the Q2 / Q3 2009 lows, I think we are going to see a slow recovery process as the taps are opened once again, and credit begins to flow more freely. In terms of the particular dealers, although there will definitely be more political and social oversight of these companies, I do not foresee them going anywhere. The only major points to make are that 1) the relative ranking will remain relatively static with the Goldman Sachs and Morgan Stanley’s of the world staying at the top, and 2) The financial institutions that have gone through restructuring, mergers, or are still tied to the government via TARP (or its foreign equivalent), will continue to suffer. The M&A business is built on reputation of the people involved in the process. If turmoil occurs at these firms, the best people tend to leave, and the business tends to go with them.
The chart below should, once again, come as no surprise to anyone. The volume and value of transactions are down across the board. However, the glaring difference year over year is in the finance sector where M&A dried up. As firms could barely understand their own books in a risk-focused environment, they were certainly unwilling to merge and acquire other firms, as many of them were wary of acquiring future potentially unknown liabilities. As such, M&A volume, although large, fell off a cliff. Most of the focus shifted to restructuring, with a large contingent of banks going belly-up, as well Bear Stearns and Lehman having an effect. I think what we can take away from this graph is the simple fact that M&A trends in 2008 continued into 2009 in terms of sectors. Oil and Gas, Healthcare, and Telecom were major contributors to the overall activity. Will this trend continue in 2010? I believe that it will, although I must say that with Berkshire buying Burlington Northern and the frenzy of activity surrounding Cadbury which culminated in its purchase by Kraft, there is definitely interest in strategic acquisitions in the Transportation and Food & Beverage sectors. However, I believe there are simply fewer opportunities for major deals in these sectors primarily due to firm size and market share, which drive anti-trust concerns.
Although, overall deal volume fell off significantly across the board, there was still a dearth of mega-deals. Looking at the largest ones, there was no overall theme in terms of sector. However, energy, materials, and pharmaceuticals were at the top of the heat. Once again, we see the dominance of the US throughout the global ranking of deals. This dominance will not dissipate in the near term, as the US market is simply configured to do deals by virtue of its political, social, regulatory, legal, and credit regimes. With credit finally coming back, expect more mega-deals coming to fruition in 2010. Also, expect an increasing number of large-cap and mid-market deals as we progress throughout the year.
As markets inevitably go through boom and bust cycles, the graph below really highlights the shift in focus of the markets from M&A to restructuring. If we lined up the IPO market activity with the two graphs below, I am positive we would see the life cycle of the market, from birth through growth up until to death. Going forward, I would expect M&A volume to recover slowly, as evidenced by the stabilization in Q1-Q4 of 2009. This will obviously be driven by the US and Euro-land primarily. I would also like see a longer time period which would give us more information about the previous boom and bust cycles, and I would want to regress these datasets against each other in order to see if there are any correlations amongst the markets. With this type of information, we might be able to better to predict what will occur in terms of activity in the M&A in 2010.
Very interesting article. I think that you will see M&A activity in Canada in 2010 improve. Having said that, there was significant M&A activity in Canada last year, including the Suncor-Petro Canada merger.
ReplyDeleteYou should take a look at Blakes 2010 M&A Preview feature, which can be found at http://blakes.com/microsites/MandA_Preview/index.html.