M&A Deal Volume Analysis 2007: What a Year!
Everyone’s been jumping onto the bandwagen of reporting the deal volumes for 2007, even before the year’s done (granted that not many more deals will be announced before 31 December). I recommend reporting from FT Alphaville, The New York Times Dealbook, and The Wall Street Journal’s Deal Journal. Note that all of these reports were from 21 December, a full week before year-end.
It was a record year (depending on whether Thomson Financial or Dealogic’s figures are used, it was $4.4 trillion or $4.7 trillion, respectively). But a year with very different figures in the first and second halves, although the second half was no where near as bad as some people predicted in August when the sub-prime crisis was in full swing and depositors were queuing outside Northern Rock while the Bank of England was bailing out the bank.
Some interesting statistics — and thoughts — from those articles and others:
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The volume of deals in 2007 was 21% higher than 2006 and (as reported by the Wall Street Journal), even higher than 2000’s inflation-adjusted figure of more than $4 trillion.
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The second half of the year was 27% lower than the first half globally, but in the US, the volume fell 46%. As the US was the ‘leader’ in the housing bubble burst and the growing liquidity crisis (and for several months the rest of the world smugly thought they might not be affected), does this mean rest-of-world volumes will decline further, catching up to the US?
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Volume in Europe was higher than in the US for the first time in five years and only the second time ever: $1.78 trillion vs $1.57 trillion (Thomson Financial’s figures). This may be partially due to the lag in Europe being affected by the credit markets, and the volumes in Europe may now decline further to match the US.
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Private equity players represented a massive 41% of the US market through the first half of the year but only 15% of the second half. As these firms drove much of this merger wave (since 2003), does their absence auger further declines? I was at a breakfast just last month were one director of a venture capital fund said he didn’t expect to make any purchases in the next 12 months; others at the breakfast were nodding their heads in agreement, too. And his was a fund still flush with cash! What has changed is the availability of ‘cheap’ debt financing.
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All these figures are announced deals, but note that BHP Billiton was given on 21 December a ‘put up or shut up’ deadline of 6 February to make a formal bid for Rio Tinto (see article here from the Financial Times). The proposed bid of $137 billion is a contributor to the 2007 ANNOUNCED volumes that could never come to pass if a formal bid is not made.
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Goldman Sachs once again led in advising on deals, but Morgan Stanley (who were largest in Europe), JP Morgan and Citi all advised on deals worth more than $1 trillion. Last year, only Goldman could claim that level.
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Deals are taking longer to complete, with the average time being 88 days in the first half of the year and now 91 days in the second half.
Where will it go from here? To no one’s surprise, the conventional wisdom is for 2007 levels to be a record level for some time. But let’s not forget that the time between the peak of the last cycle and the start of this cycle was only three years — a record short time. Notably, the troughs between cycles have been getting shorter, so it may not be long before we see such global volumes again.
Intelligent Mergers 
My opinion of deals getting done in 2008 is it will definitely be less than last year. Although, 2007 was a record breaking year in the amount of capital raised for domestic private equity ($302 billion) and almost a record year for VC funds ($26 billion). This capital must be deployed otherwise it will seek a higher return elsewhere. The market is awash in cash not only from domestic funds but also sovereign funds, oil money that is up 400% from 2 years ago and let’s not forget the cheap dollar making overseas capital have increased purchasing power hear in the US. All this cash bodes well for an increased amount of transactions but the biggest impediments are pricing, due diligence and a potential recession. There have been a number of very high profile deals not getting done for a variety of reasons. The Yahoo merger will be looked at very closely because if it does not happen, regardless of reason, this will really put a chill on the amount of deals actually closing in 2008.
Andre
Sunday, 3 February 2008