Mergers and acquisitions slowed significantly in the third quarter, stymied by economic uncertainty that stifled the confidence and growth horizons of corporate executives, according to Wall Street dealmakers.
The few companies eager to seize on opportunities are bumping up against reluctant lenders.
High-yield debt that serial acquirers in the private equity world rely on for deal-making has become harder to find, in part because troubled European banks are bowing out of financing deals. Private-equity backed M&A, which typically relies heavily on junk-bond financing, is down 22 per cent from the last quarter.
“The steady M&A flow has turned to a drip,” said Paul Parker, head of global M&A at Barclays Capital, who like many of his Street cohorts is paring back expectations for the rest of 2011.
Announced M&A deals for the volatile third quarter will have declined about 23 percent from the previous three months, according to Thomson Reuters Deals Intelligence, as stock market fluctuations, the European debt crisis and the US budget stalemate put many planned deals on ice.
Indeed, the $16.5 billion purchase of Goodrich Corp that United Technologies unveiled on Wednesday was on track for an August announcement before wild market gyrations sidetracked deal talks, a source familiar with the deal said.
The good news is that well-capitalized companies such as United Technologies can get financing when they want it.
“I still think there is a strong desire to do M&A but it is hard to do with these levels of uncertainty,” said Jeff Raich, co-founder of Los Angeles-based investment bank Moelis & Co.
Bankers are eternal optimists, of course, and Raich and others said that once economic and geopolitical clouds clear, deal books will circulate again.
The global deal count for the first nine months is up 20 per cent over last year, mostly due to strength in the first half of the year, the data shows. Deals in the third quarter, through Sept. 22, fell to $539 billion from $699 billion in the previous quarter, according to Deals Intelligence.
Europe and Asia Pacific have been hit particularly hard, with deals in each region falling 34 per cent from the previous quarter.
Parker fingered the lack of financing for deals involving noninvestment-grade companies as a significant cause of the drag.
“A number of deals have gone sideways,” he said, “but I’d expect many of those situations to be resurrected when the markets rebound.”
Investment-grade companies have had more luck, bankers said, but even they have bumped up against tighter lending as banks fret over the effects of the European debt crisis, according to one senior energy investment banker.
Joseph Frumkin, managing partner of Sullivan & Cromwell’s mergers & acquisitions group, said lead lenders who sell part of their loan commitments to other banks have become increasingly edgy.
“As the U.S. banks form syndicates, you can see concerns about European banks participating in syndicates,” the lawyer said. “What if they don’t make good on their commitments?”
One bright spot for bankers is that the size of deals announced in the quarter increased to an average of $155.9 million, the second-highest level in the last three years, according to Thomson Reuters data.
Big deals generate big fees, which has Goldman Sachs, JPMorgan Chase and other bankers celebrating. Goldman, the top global M&A adviser this year, shepherded shale gas producer Petrohawk Energy in its $12.1 billion sale to BHP Billiton.
JPMorgan was one of the advisers to Medco Health Services Inc on its $29.1 billion planned sale to Express Scripts Inc.
Large companies with strong reserves of cash will continue to be aggressive, in spite of the current uncertainty, bankers insist.
“In volatile markets like the ones we are experiencing, we are advising our clients to be well-prepared in order to be in a position to move decisively when market windows open,” said Jake Donavan, JPMorgan’s head of corporates and client coverage for Europe, the Middle East and Africa.
Even bankers’ optimism has limits, however. After starting with a bang, deal volume for 2011 is on track to end only 5 to 10 per cent higher than last year, Parker estimated. That points to a dreadful fourth quarter since deal value is currently about 20 per cent up from last year.
Scott Matlock, Morgan Stanley’s London-based chairman of international M&A said that the themes that drove healthier dealmaking last year — strong cash balances and available financing — are still present.
“Uncertainty about the global economy is the swing factor that could impact the next few quarters,” he said.
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