Bankers should be thankful for even meager M&A
Cross-posted from today’s NYT.
Rosy predictions of a big bounce-back in mergers and acquisitions may not be coming true, but bankers are fortunate that U.S. deal volumes are recovering as if the recession just endured was run-of-the-mill. After two down years, the value of American corporate match-making is flat in 2010. That’s no boom — but if history is any guide, it’s also nothing to complain about.
After declines of 41 percent in 2008 and 22 percent in 2009, the $322 billion of U.S. announced deals so far in 2010 is off 1 percent compared to last year’s pace. That pattern is in line with the last two recessions, according to Thomson Reuters data. The downturn of the early 1990s saw three dry years, the dotcom bust two fallow ones.
But considering the depth of the latest recession compared to the prior two, one might think dealmakers would still be in hibernation. Consider: During the latest recession, five of six quarters from 2008 through the second quarter of 2009 showed negative real GDP growth; the other recessions had just two down quarters. Also: employment has fallen, and stayed, 6 percent from its pre-recession peak; the other recessions saw employment dip less than 2 percent below peak level, and hiring on the other end picked up more quickly.
Yet some on Wall Street had been predicting a more robust rebound. Goldman Sachs predicted “a perfect storm for M&A” late last year, pointing to cash-stuffed corporate coffers — now at a record according to the Federal Reserve — and also benign capital markets. Greenhill & Co also predicted 2010 would be big for dealmakers.
But while last year’s fourth quarter showed some promising return to dealmaking — including TPG’s buyout of IMS Health and Berkshire Hathaway’s acquisition of Burlington Northern, the momentum hasn’t carried over.
Some may find that surprising. After all, while many companies achieved profit targets through cost cutting during the economic downturn, the juice has probably been squeezed from that lemon. Acquiring competitors is one way to find additional cost-cutting opportunities through synergies. For instance, while CenturyTel and Qwest have been cutting costs on their own, they now hope their merger will yield over $600 million more in fresh savings.
The trouble is that even though the U.S. economy has stopped contracting, big risks still weigh on the animal spirits of potentially acquisitive executives. Job growth is anemic and credit markets have seen renewed volatility in the wake of Europe’s sovereign debt crisis. That volatility may have helped scuttle Prudential’s bid for AIG’s Asian insurance business, and a $15 billion leveraged buyout of Fidelity National Information Services.
Put it all together, and dealmakers pining for more action should probably just consider themselves lucky.