Shadows are beginning to fall over the pitch books of merger and acquisition bankers. Announced M&A deals declined in this year's second quarter from the previous three months, casting gloom on hopes of a reviving world economy that will prompt executives to put their cash-rich balance sheets to work.
It marked the first sequential quarterly decline in activity measured by deal value in more than a year.
"There is still an upward trend in M&A momentum, but I think we are in a rough patch right now," said Jeff Raich, managing director and co-founding partner of independent investment bank Moelis & Co in Los Angeles.
Volatility in equity markets, uncertain economies and sovereign debt problems "are dampening CEO confidence and slowing the pace of deals," he said.
Announced M&A deals in the second quarter totalled $611 billion, down 23 percent from the first quarter when mega deals such as AT&T Inc's (T.N) $39 billion acquisition of T-Mobile USA propelled the league tables, according to preliminary data from Thomson Reuters.
"Sky Falling A Bit"
More worrisome for bankers is that the economic shivers have returned just as risk appetites were recovering from the debacle of 2008.
In the context of the economic crisis in Greece, "It's one thing if you slide back after six months, but sliding back after three years gives people a greater sense of fragility," said Paul Parker, Barclays Capital's head of global M&A. "People are starting to anticipate the sky falling a bit."
Deal totals for the first six months, however, look comparatively robust. Boosted by a strong first quarter, worldwide M&A has risen 40 percent so far this year to $1.4 trillion, the best first-half since 2008.
Goldman Sachs Group Inc held the lead in the second quarter and the first six months of the year among deal advisers worldwide. In the United States, Morgan Stanley topped the league tables in the first half of the year, according to Thomson Reuters data.
The sour news of recent months could serve as a deal catalyst for companies that can no longer rely on the stimuli of growing economies, say some optimistic bankers.
"Cash balances are still high and debt capital is still available at historically low costs," said Patrick Ramsey, Co-Head of Americas M&A for Bank of America Merrill Lynch.
"The challenges of organic growth have heightened, not lessened, with a slower economic recovery."
Bank of America Corp ranked No. 6 among global deal advisers in the first six months of the year.
An equally optimistic Hernan Cristerna, head of European, Middle Eastern and African M&A at JPMorgan Chase & Co, said companies are acknowledging the pace of economic recovery is too slow to drive earnings.
"I think there is potential for the M&A market to grow by about 20 percent this year," he said.
JPMorgan has advised on global deals worth nearly $300 billion in 2011, giving it a rank of fourth, up from sixth in the first half of 2010.
Giuseppe Monarchi, head of M&A for the EMEA region at Credit Suisse Group Ltd, which ranked third globally compared with fourth last year, said 2011 will almost certainly be a stronger year than 2010.
While he sees a slowdown from the first half of the year, Monarchi and other bankers say volume will be stoked by the continuing availability of cheap debt, strong cash balances and a narrowing valuation gap between buyers and sellers.
"We could see a $30-40 billion investment grade financing for a deal in the right sector," JPMorgan's Cristerna said.
Barclays Capital's Parker said returning cash to shareholders through stock buybacks or dividend increases could signal corporate weakness.
"It's a meaningful statement to tell your shareholder base that your best approach to having too much cash is to give it back," Parker said.
"It can cause people to question the growth prospects of your industry and your growth prospects as a company within that industry. They really want to understand why you are returning cash instead of deploying it."
M&A deals this year have been particularly strong in the energy and power and financial industry sectors, according to the Thomson Reuters data. Transactions overall have been fairly broad-based, with activity spread through technology, healthcare, real estate, consumer retail, and media and telecommunications. The largest deal of the second quarter was the $20.8 billion acquisition of Synthes Inc by Johnson & Johnson in April.
"We are still early in what we believe is a multi-year cycle of increasing M&A activity," said Ramsey. "When we've come out of recessions in years past, what we've seen is strong recovery in M&A markets that correlates to strong recovery of equity markets. There's always bumpiness along the way."