2010 won’t be the real deal for mergers

December 23, 2009

Ask an investment banker about mergers and acquisitions in 2010, and the optimism is infectious. Except that it seems that few corporate bosses have caught the fever.

The bankers think they could do with a break. Global M&A hit a five-year low of $1.97 trillion in 2009 — 53 percent below the 2007 high. But now that financing is not as squeezed, confidence is supposedly returning and business conditions are apparently improving.

Privately, the chief executives tell a different story. They are not nearly as bullish as some of their budding advisers think.

To start, the credit crunch and sudden recession have left bosses in something like a state of shock. After one painful shift from thinking about growth to worrying about shrinkage, there’s little rush to make another big mental transition.

Finance remains a challenge. Even when credit is available, managers and shareholders want to preserve credit ratings. Major cash takeovers will be rare. And after the stock markets’ gyrations over the last year, it’s especially hard to agree on price.

Finally, the economy is not exactly flying. For many companies, the only certainty is that improving revenues is going to be tough. Cost-cutting and margin improvement are more urgent priorities than big corporate deals.

Still, bankers should find more than a few crumbs of business. Corporate caution may be their biggest ally. Italian utility Enel is looking to raise $7 billion from asset sales – to cut debt and keep its credit rating. Kraft may want to do the same should its bid for Cadbury succeed. A healthier banking system could also help, if lenders are willing to take the losses that come with restructurings.

Governments will be sellers as the equity investments of the crisis are reversed. Private equity firms are probably buyers, as they try to deploy the big cash hoards built up before the crisis, and sellers, as they try to lock in some gains on older deals.

Investment bankers looking for work might want to study the global car industry carefully. There’s overcapacity in developed markets, rapid growth in developing markets and governments that would like to cut back on support.

China is another promising, although well known, prospect. There have been car and mining deals, but the really big numbers would come from the deployment of some of the country’s gargantuan foreign currency reserves.

All in all, 2010 will probably be a better year for M&A bankers than 2009. But those expecting the real deal will be disappointed.

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