M&A Activity Forecasts for 2011
December 22nd, 2010Two separate articles in the New York Times suggest that M&A activity will increase into the $2.7-$3 trillion range in 2011 (see Deal Makers Cautiously Return and M&A Ready to Soar).
From the former:
As the dark clouds of economic uncertainty lift, the environment for corporate deal-making is looking brighter.
With record cash on their balance sheets, United States companies are once again willing to invest in growth, according to McKinsey & Company’s quarterly report on economic conditions.
William Huyett, a director at McKinsey, said companies were cautiously optimistic, a positive sign for deal-making activity in 2011.
“First and foremost, there is confidence that the real markets are starting to grow again, unemployment is starting to drop and capital markets are starting to stabilize,” Mr. Huyett said. “Boards of directors are less skittish in pursuing transactions. We’re far from out of the woods, but the period of absolute uncertainty has passed.”
Thomson Reuters and Freeman Consulting Services recently predicted a 36 percent rise in global deal activity to $3 trillion in 2011. PricewaterhouseCoopers announced this month that “key conditions are in place for a resurgence in deal-making in 2011.”
From the latter:
Investment bankers should prepare for a surge in mergers and acquisitions. If deal activity follows a pattern similar to previous cycles, 2011 ought to be a considerably better year.
…the omens are favorable. In previous periods of depressed merger activity, there has been a clear bounce back by the end of the second year after the trough. For example, deal volume in 1991 was down 41 percent from its peak in 1989, according to Thomson Reuters data. By 1993, it was up by a third.
After two awful years in 2001 and 2002, when global merger deals plummeted from $3.4 trillion to $1.2 trillion, there was a 56 percent surge from trough levels in 2004.
In the current downturn, the 2009 nadir was a 52 percent decline from the peak in 2007. If there is a rebound, and the pace of recovery relative to the pace of decline is roughly the same as in previous cycles, then there should be about $2.7 trillion worth of acquisitions in 2011.
That may feel like a bonanza given the current climate. But in reality, it would only take deal activity back to the 2005 level.
I am inclined to agree that M&A activity will increase somewhat in 2011 from 2010; however, I am a bit more cautious than some of the forecasters. I believe that the $2.7-$3 trillion range is attainable, …provided that the global economy doesn’t experience a severe hiccup emanating from one of the larger European sovereigns (e.g., Spain and/or Italy).
Sphere: Related Content
