In the year to date, worldwide deal volume is down 36 percent to US$475.6bn from a high in 2006 of US$746.7bn. While deal value actually increased last year in the UK by £92.3bn year on year to March this year, this was largely due to the UK government’s bailouts of several of the UK’s leading banks. The same is true of Germany, which chalked up deals worth US$33bn – one of which was the government’s US$13.6bn acquisition of Commerzbank, the fifth largest M&A deal globally.
While the US is still ranked as the most targeted nation with total deals worth US$165.8bn, this is down 27 percent from US$227.8bn in 2008 year to date. William Vereker, co-head of investment banking at Nomura, has said that the M&A outlook for 2009 was the worst for many years. “The combination of falling earnings, the absence of credit, lack of confidence and ongoing market volatility will deter activity,” he said. “Cash transactions will be rare – stock for stock transactions in consolidating industries are likely to emerge as the main sources of activity.”
The declining trend in M&A activity has also hit some emerging economies hard. India has plummeted from being one of Asia’s most lucrative markets for share offerings and mergers and acquisitions to one of the least active this year, with investment bank revenues in the country plunging to about one quarter of their levels a year earlier.
But despite the sharp falls in volume, bankers expect deal flow to revive in the coming months as India’s largest conglomerates restructure to reduce debt, and entrepreneurs, who over-supped on credit during the liquidity boom, are forced to sell out.
M&A involving Indian companies has fallen 47 percent to US$5.5bn so far this year against the same period last year and equity capital market (ECM) deals are down 95 percent to US$280m, their lowest since 2003. It is no wonder that investors and banks have been shocked by the decline. India’s conglomerates have been some of the most aggressive acquirers in emerging markets in the past few years after launching deals such as Tata Steel’s £6.7bn (US$9.7bn) purchase of Anglo-Dutch steelmaker Corus.
However, there are signs of recovery on the horizon for dealmakers anxious to get deeper into the Indian M&A market. Bankers expect activity to pick up in the second half of this year. The Tata group is expected to sell some assets seen as non-core, bankers say, while its rival Aditya Birla conglomerate is also expected to undertake some restructuring to manage the debt burden from its acquisition of Novelis, a North American aluminium group. A number of smaller Indian companies are also expected to sell controlling stakes.
Added to that, more Asian financial services companies say they will make acquisitions this year in spite of the global economic crisis as they plan to take advantage of the downturn to expand, according to a survey by Big Four accounting firm PricewaterhouseCoopers (PwC). Among Asian financial groups, Taiwanese and Chinese companies are the most likely to undertake merger and acquisition activity in the next 12 months while Indonesia and Vietnam have overtaken China and India as the most popular places to do deals.
The reasoning is simple: with relatively stronger balance sheets, Asian financial institutions are seeking to use the crisis as an opportunity to snap up cheap assets and grow their businesses. According to PwC, 42 percent of the 215 Asian financial institutions polled forecast that they will do a deal this year, up from 38 percent in last year’s survey.
However, deal activity still may not be as strong as in previous years. The value of transactions for this year was set to fall to the level of 2005 and 2006, which reported US$38.7bn and US$64.5bn worth of deals respectively, as companies are more likely to carry out smaller transactions. Asian financial institutions struck US$99.1bn worth of deals last year, down from US$125.9bn in 2007, due to notable declines in Japan and South Korea and Taiwan. Nearly half of the companies surveyed said expanding their businesses was their key strategy this year. Only 22 percent have frozen investment and just 2 percent said they would exit Asia.
In China, deals flow is expected to remain strong although it is forecast to be shy of last year’s US$34.6bn. Nearly 70 percent of companies expect to enter new markets this year, although they remain cautious after a few major international investments, such as the US$5bn investment by China Investment Corp, the country’s sovereign wealth fund, in Morgan Stanley, had turned sour.
Even Africa’s leading economy is beginning to buck the trend and show signs of a recovering M&A market. While in line with the rest of the world, South Africa has seen a marked decrease in the number of deals announced so far this year, it has recently seen two mega-deals take place which has boosted its deal value.
With only14 announced transactions in the first quarter, deal numbers in the region were down 58 percent from the fourth quarter of 2008 (33 deals) and 60 percent from the first quarter of 2008 (35 deals). However, two deals worth over US$2bn between them have given South African M&A a solid boost to the start of the year. While the rest of the globe saw its worst first quarter in six years in terms of total deal values – with a 29 percent global decrease on the total value of M&A compared to the first quarter of 2008 – the total value of South African M&A announced in the first quarter of 2009 (US$2.8bn) is greater than the equivalent quarter in 2008.
Two major acquisitions announced so far this year account for this increase: US-based hedge fund Paulson & Co’s US$1.3bn stake acquisition in the mining company AshantiGold Ashanti Limited, valuing the entire equity capital at US$11.32bn; and South African property company Redefine Income Fund’s US$928m offer for ApexHi Properties.
The Middle East’s deal market is also beginning to show signs of recovery, which is likely to rekindle investor optimism. An increase in the number of deals in the region’s debt capital markets over this April helped to prevent a near complete collapse in investment banking revenues in the region, which have more than halved during April following a sharp decline in mergers and acquisitions activity. Expecting the global economic crisis to prompt a spate of mergers and acquisitions, the Abu Dhabi Investment Company (ADIC) has hired a senior investment banker from Rothschild to build a team to give advice on cross-border investment.
Others are also hopeful that the Middle East and North Africa ramps up its deal activity. According to a recent survey by law firm Norton Rose of nearly 1000 senior executives, half the companies surveyed in the region plan at least one M&A deal in 2009. According to Nazeem Fawaaz Al Kudsi, chief executive of ADIC, “the Middle East is not only a source of capital, but also a region of investment opportunities”. Dealmakers will certainly be hoping so.
