What next in M&A?
An excellent study was issued by IntraLinks and mergermarket a few weeks ago. (You can find it here.) In August and September, they conducted a survey of experts in M&A – the people within each company responsible for deals. The key finding: almost two-thirds of those surveyed thought that the overall economic environment in their own regions would improve in 2010 (which is in distinct contrast to the economist, politician and journalist Cassandras who feel that we’re in for a double dip or even worse in 2010 and beyond). Interestingly, 16% felt that this recovery was already underway and 8% that it would happen before year-end. And in Europe, over 40% of respondents felt that corporate M&A would increase in the next year (and only 12% were pessimistic).
This is a significant finding, because the M&A market is driven at the corporate board and senior exec level by optimism (I would almost prefer to say ‘hubris’) and general business confidence. The perception of an improving market is critical to the market’s turnaround prospects.
But caution amongst those surveyed is also noted in the study: when asked about their own company’s activity, only about a third were optimistic or very optimistic. (Yet only 20% were pessimistic and most (44%) were neutral.) This is a valid cause for concern. This would indicate that firms are reticent to commit their own money toward committed rapid expansion – and an M&A deal IS the way for a major existing firm to expand rapidly, even if most deals fail in the execution – despite those firms seeing the general business environment improving.
It was nice to see that 75% agree with me that the M&A market has already reached its inflexion point (see ‘M&A inflexion point: The turn to ‘up’ in activity’ which we published back in late September).
We’ve noted before on this site back in the summer (see ‘Distressed and bankrupt acquisitions: Should you do one of these deals?‘) that distressed acquisitions would be a major driver for some time to come. This Intralinks / mergermarket survey confirmed that, as almost half of all respondents in Europe felt that distressed deals were the principal driver to the market for the next year (followed by 31% looking at market consolidation as the principal driver). The overhang from the recession will still take a while to work through the M&A system, which is a wonderful mechanism to assist industry in self-correcting.
What are firms most expecting to do? When respondents looked at what they would do in their own companies, they still feel that their M&A activity will be driven by finding undervalued targets (over 50% thought this). If this is true, the growth in M&A activity might be faster, as a continuing stock market rise would make fewer such undervalued targets around. Nicely, two-thirds of the companies DID expect to make an acquisition in the next 12 months. Given the lead time to many of these strategic deals, the planning and even negotiations may be underway already. This is support for the strong backlog of deals that many advisors note.
Overall corporate organisational restructurings were expected by 73% of respondents, and by a whopping 81% of those in Europe. Europe really does appear to be the region that is pulling out of the recession with the greatest difficulties remaining.
I found most interesting the thoughts about which industries would see more consolidation, at least according to this survey. There’s so much conjecture about where the next big deals will come, and each observer seems to have different feelings. It’s nice to see a survey taking in the opinion of many experts, as this IntraLinks / mergermarket survey is. Contrary to my own personal view, financial services was seen in Asia/Pacific and North America as being the most likely industry to see deal activity. In Europe, the consumer area was suggested to be the most active. Notably, pharmaceuticals, industrials & chemicals, the extractive industries and the technology industries that saw huge deals in 2009 were not in the top list.