Crisis-hit Europe lags M&A rebound in Asia, U.S.

By Quentin Webb

LONDON (BestGrowthStock) – Hobbled by a rampant sovereign-debt crisis, Europe is lagging a global rebound in dealmaking that has pushed global mergers and acquisitions (M&A) up nearly 40 percent this year.

Europe’s share of global M&A has fallen to 25 percent of overall deals by dollar value this year, the lowest since 1998. That compares to 30 percent last year and an average 38 percent between 2002 and 2008.

“Confidence in Europe has perhaps been shaken more often than elsewhere, with particular skittishness over currencies and sovereign failure,” said Michael Hatchard, co-head of European M&A at law firm Skadden, Arps, Slater, Meagher & Flom.

The crisis has forced Ireland into an 85 billion euro ($111.3 billion) bailout and sent risk premiums soaring on Portuguese, Spanish and Italian bonds, as investors fret about public finances and the health of banks.

A slowdown is bad news for investors — denied takeover premiums for stocks they own — and robs investment banks of the fees they earn from advising on deals and financing them.

A UBS survey this week found two-fifths of the European executives it polled had canceled M&A plans in 2010, dubbing it a “lost year” for European M&A.

Deals targeting European companies in November dropped $5 billion from the previous month to $43 billion — the lowest monthly total since April, the data showed.

European M&A is up just 10 percent in the year to end-November, well below the 38 percent rise that has lifted global M&A volume to $2.13 trillion.

The rise is led by a 59 percent leap in deals targeting companies based in Asia, excluding Japan. Deal volume in the United States is in line with the wider rise.

The irony is that European companies are flush with cash — $1.17 trillion of it — and in many cases are keen to outgrow sluggish economies by striking deals that open up new markets or offer big cost savings.

However, while cash piles may allow some chief executives to agree deals regardless of market conditions, uncertainty may make it more attractive to hoard cash.

Gyrating stock markets — the VSTOXX (.V2TX: ) index, a measure of European equity volatility, is up about 17 percent in a month — also make it tougher to price deals involving shares.

And for riskier borrowers, such as private equity firms pursuing leveraged buyouts, the crisis has dampened some of their best sources of funding.

High-yield bonds in euros have fallen 4.35 percentage points in price in the last month to 93.18 percent of face value, Merrill Lynch data shows, suggesting new deals will have to offer buyers higher yields to succeed.

Still, UBS is calling for a rebound in 2011, with European companies broadly as debt-light as they were at the trough of the previous M&A cycle, and nearly one-third of larger respondents planning a sizeable deal next year.

“M&A is no longer viewed as ‘heroic but dangerous’. There’s an awful lot of preparatory work going on, and evidence of pent-up desire to engage in strategic transactions,” said Skadden, Arps, Slate, Meagher & Flom’s Hatchard.

“Strategic decisions are taken with a much longer horizon than the immediate macroeconomic environment,” said Hatchard, whose company is the world’s top legal adviser for M&A in the first three quarters of 2010.

($1=.7639 Euro)

(Reporting by Quentin Webb; editing by David Hulmes)

Crisis-hit Europe lags M&A rebound in Asia, U.S.