M&A potential will succumb to laws of physics

December 20, 2013

By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The laws of physics are apt to work against an upturn in mergers and acquisitions. The investor love being heaped on acquirers should be a catalyst for takeovers amid plentiful cash and credit. The pendulum could also swing to correct other market anomalies. Yet opposing pressures still exist and chief executives and boards have settled into a cautious mindset. Inertia is about as powerful a force there is.

For years now, investment bankers have been anticipating a surge in transactions because of the balance-sheet ammunition available to clients. Benign borrowing conditions and overflowing war chests haven’t yet made much difference, however. As of mid-December, according to Thomson Reuters data, global merger volume was roughly on pace to match the $2.5 trillion of deals unveiled in 2012. And the total wasn’t much different in 2010 or 2011.

Executives in a position to make such decisions expect a sharp increase in global deal activity in 2014, according to a survey conducted by Thomson Reuters and Freeman Consulting, and they have their reasons. For starters, investors have rewarded acquisitions of $1 billion or more at a higher rate this year than in the previous five, as buyers chose sensible targets that provided large synergies. Sysco, Salix Pharmaceuticals  and Gannett are among the acquiring companies whose shares gained at least 10 percent upon announcement of a deal.

Mergers are also lagging broader indicators. According to Deutsche Bank, the number of deals tends to correlate closely with equity market valuations but has now fallen noticeably short in comparison to buoyant stock prices. And the dollar volume of acquisitions has tumbled below 3 percent of worldwide GDP for the first time since the mid-1990s. A return to historical averages would mean more deal-making.

Corporate chieftains, however, have grown more fearful of aggressive regulators and activist investors disrupting their plans. American Airlines parent AMR and McKesson are the latest to encounter such troubles and remind chief executives of such hazards. Lingering memories of the 2008 crisis coupled with expectations of continued sluggish economic growth will also help keep boardrooms conservative. As long as the rewards of deal-making don’t glitter enough to obscure the risks, eager merger practitioners should prepare to endure more unrealised potential.

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