Boards play safe as new M&A cycle begins

By Quentin Webb and Soyoung Kim

LONDON/NEW YORK (Reuters) – A nascent recovery in global dealmaking, focused on safer deals with clear strategic logic, probably marks the start of several years of rising mergers and acquisitions, senior dealmakers said on Monday.

While company earnings and balance sheets are strong, economic fragility, natural disaster, and political tumult in the Arab world are hurting corporate confidence and may hold back a more robust recovery in dealmaking, bankers said at the Reuters Global Mergers and Acquisitions Summit.

“Volatility is the nemesis of dealmaking,” Cary Kochman, joint global head of M&A at UBS AG (UBSN.VX: Quote, Profile, Research), told the Reuters Summit in New York.

“While there is a little bit of steam built up in the M&A market and dialogues are increasing, we’re seeing a pretty good outbreak of transactions right now. There are risks and headwinds to that that we need to be aware of,” Kochman said.

Adrian Mee, head of international M&A at Bank of America Merrill Lynch, said in London that last year’s rise in deal values — the first annual increase since 2007 — suggested a new, multiyear M&A cycle was under way.

“I think we have got three or four years of good M&A business in front of us. But it will depend on continuing GDP growth, strong equity markets and international events not getting in the way,” Mee told the summit in London.

“Just from a general perspective, can we get back to 2007? A tough question, certainly not in the very very near term,” Jeffrey Buckalew, head of North American corporate advisory at boutique investment bank Greenhill, said in New York.

Three deals worth more than $18 billion combined and involving Pfizer (PFE.N: Quote, Profile, Research), Solvay and Vodafone have landed since Sunday night, helping boost global stock markets.

The series of deals announced over the weekend followed a 55 percent jump in global M&A in the first quarter to almost $800 billion.


Strategic buyers, as apposed to private equity firms, have accounted for more than 90 percent of dealmaking so far this year, culminating in AT&T Inc’s (T.N: Quote, Profile, Research) $39 billion bid for T-Mobile USA.

“Stock prices generally are up versus where they were a year ago and there is perhaps more comfort on the one hand considering a strategic deal as a seller, and then on the other hand with higher stock prices giving more comfort from an acquirer standpoint in using that stock as currency,” Patrick Ramsey, co-head of Americas M&A at Bank of America, told the Reuters Summit in New York.

Ramsey noted that in seven of the top 10 cash deals in the United States this year, share prices of the acquiring companies rose on the day of the announcement, unlike in the past where an acquirer’s shareholders often reacted negatively as they waited to see synergies from the combination kick in.

“The market is accepting that it is a shrewd moment to be an acquirer,” said UBS’ Kochman.

Wilhelm Schulz, head of European M&A at Citigroup (C.N: Quote, Profile, Research), said: “Earnings are good, leverage is down, people know what they want to do.”

However, current economic uncertainties mean companies are taking longer to weigh up deals, said Matthew Ponsonby, co-head of M&A for Europe at Barclays Capital.

“The issue has been that each time you think all the shoes have dropped, there is another one that falls,” he said. “It is very hard to pull the trigger when you have a Japan, a Greece, a Portugal, or whatever it is.”


While Asian buyers are trying to expand their empires, Western acquirers are typically opting for less bold deals, often funded with available cash, said Scott Matlock, chairman of international M&A at Morgan Stanley.

“U.S. and European acquirers are tending to do … logical, safe transactions that do not stretch either their balance sheets or take them to new places in terms of corporate opportunity.”

Dealmakers expect cross-border deals to continue to rise as Western firms look to tap growth overseas and emerging nations led by China seek access to technology and natural resources. However, nationalism could remain a major obstacle to deals getting to the finish line across a wide range of sectors from resources to telecoms to food, they say.

Miner BHP Billiton’s (BHP.AX: Quote, Profile, Research) hostile $39 billion bid for Canada’s Potash Corp (POT.TO: Quote, Profile, Research) collapsed last year in the face of political opposition in Canada.

“I suspect it will come up again. The economic nationalism, national champion idea is absolutely out there,” said Howard Ellin, a New York-based partner at law firm Skadden, Arps, Slate, Meagher & Flom LLP.

“Everybody’s got a piece of it whether it’s yogurt in France or banks in Poland or exchanges in Australia or Chinese investments in certain spaces in the United States,” he said.

Chinese firms in particular face a series of regulatory, political and procedural challenges in buying U.S. companies, which is driving them to other countries that are seen as friendlier, such as Canada, dealmakers said.

“I think there’s no question that Canada presents an easier environment for Chinese companies to acquire,” UBS’ Kochman said.

Still, in certain sectors where the Chinese may be the most logical buyer, dealmakers tailor the auction process to make sure they participate in the process.

“If you’re a sell-side adviser and if it’s clear as we think through the list of the most logical buyers, if we conclude a Chinese company is high on that list, then … we will work with a client to design a process that can accommodate a Chinese buyer” said Bank of America’s Patrick Ramsey.

(Additional reporting by Victoria Howley, Simon Meads in London, Paritosh Bansal, Megan Davies, Nadia Damouni and Jessica Hall in New York, editing by Matthew Lewis)

Boards play safe as new M&A cycle begins