Optimism over M&A may be deserved – at a discount
By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
M&A bankers and lawyers telling a PR firm that specializes in deals they expect to see more merger activity makes for sweet echo-chamber music. The survey released by Brunswick Group to coincide with an annual U.S. dealmaker powwow found three out of four practitioners expecting more M&A globally this year than last. They’re more bullish than ever about North America, with 97 percent anticipating growth in the region. A discount needs to be applied to all the optimism.
It’s a known fact that deal pipelines are almost always backlogged, no matter how bleak the environment. In the dark days of early 2008, nearly 60 percent of those polled either said the market had hit a trough and would turn around in 12-18 months or it was just a short-term blip. As it turned out, the trough was two years away. Merger volume tumbled 30 percent to $2.9 trillion that year – and another 30 percent in 2009, to $2 trillion.
Even pessimistic M&A advisers have proven to be overly cheerful. Five years ago, four out of 10 respondents – and seven out of 10 in 2009 – told Brunswick they reckoned it would take five years to get back to the 2007 peak level of $4.1 trillion. That would be a neat trick. The announced volume in 2012 was $2.5 trillion, roughly where it has been for the last three years, according to Thomson Reuters data. It would take a spurt of over 60 percent to get there.
A recent spate of multi-billion-dollar deals last month involving Dell, Heinz, American Airlines and Comcast undoubtedly will have inspired some of the rosy attitudes evident in this year’s poll, conducted from Feb. 25 to March 4. And yet only at the eleventh hour did last week narrowly avoid being the first in over 11 years without a $1 billion transaction. Year-to-date activity is up just 3 percent from 2012, after dipping 1 percent last year. In the world of M&A, a premium of 30 percent is often layered onto the observable value. The same is probably true of what dealmakers say about their business.