Fresh Blow to M&A as It Enters 'Triple Dip Recession'

Despite hopes that M&A would move into a new growth phase earlier this year, it has now entered a triple dip recession in terms of value since the peak of the market. After initial gains, global deal values fell away through the first six months of 2013, dipping back in to the red for the third time since the credit crunch/financial crisis began, according to data analysis by EY.


M&A in the first half of 2013 fell by 12% in value as against the same period in 2012, from US$1.13t to just under US$1t – the first time it has dipped below the critical US$1t mark since 2009.


A sharper fall was only averted by a solid first half performance in the US, which saw deal value up 43% on previous year – contributing 46% of total global deal value, as opposed to 28% in 1H 2012. This was driven by a flow of mega-deals in the country, accounting for nine out of ten of the largest deals announced in the first half of the year.


“Continued caution was the prevailing M&A sentiment in the first half of 2013," says Pip McCrostie, EY’s Global Vice Chair, Transaction Advisory Services. "The Eurozone crisis continues to impact nine global companies in every ten and, as we predicted earlier this year, this has translated into a reduced appetite for M&A – even in many formerly deal-hungry emerging markets."


McCrostie notes that the fundamentals for M&A are strong in terms of cash and credit availability, but EY expects limited deal activity will continue through 2013. Large corporates recognize there is a favorable environment for deals and are actually expecting more M&A to happen – but by others. Most are adopting a “you first” approach, unwilling to take the plunge themselves.


“While equity markets have hit new highs this year, even a hint of concern around quantitative easing (QE) in the US, or growth levels in China, sends jitters up the spine of would-be investors, which is reflected in market response.”


Regional drivers
M&A levels in the Eurozone have fallen significantly in volume and value terms, down 17% and 38% respectively, principally driven by a fall in deal value of banking and capital markets transactions. Deal volumes fell across the board, due to declines in consumer products, diversified industrial products, media and entertainment, power and utilities, real estate, retail and wholesale, and technology.


BRIC volumes overall were driven down 14% primarily by mining and metals and life sciences in China, diversified industrial and real estate declines in Russia and CIS, and real estate in Brazil. India, however, held steady in volume. BRIC M&A is down to the lowest level since 2007. Brazil deal value has fallen to a third of what it was during the same period in 2012 and the “Cyprus effect” has hit Russia during the first half of the year.


Top 10 deal makers: China takes #2
The US cemented its spot at #1, with US$455b worth of deals. For the first time China has taken the #2 spot in terms of M&A value for the first six months of a year. It carried out US$80b worth of deals, almost double that of the UK in third place (US$41b).


“China’s growing global economic influence has been a re-occurring theme over the past decade,” continues McCrostie. “Now the numbers tell their own story – the shift in the balance of M&A power has accelerated since the financial crisis and will likely become even more pronounced in the second half of 2013.”


Unsurprisingly, China was also the most preferred emerging investment destination for global corporates in the first half of 2013.


Inbound deal value in to the region was 74% higher than in the first 6 months of 2012. The US retains its top spot as most preferred destination globally.

Deal volume falls across all sectors
Globally, sectors dropped across the board in volume terms as against the same period in 2012 – big fallers here were mining and metals, down 22%, and oil and gas, down 18%. Mining and metals dipped most in Canada, and also saw a significant fall in China.


Oil and gas saw subdued activity from the majors, after a particularly active second half of 2012 as US players sought to complete deals ahead of potential future uncertainty, and European companies disposed of non-core assets due to overcapacity, decreasing incomes and deleveraging.


However, large deals, primarily in the US, saw certain sectors make big gains in value terms. Consumer products were up US$41b to US$114b, a 55% increase. Media and entertainment was up 44%, to US$37b; telecoms rose 72% to US$63b; asset management was up 58%, to US$29b.


The biggest faller in value terms was mining and metals which, in the absence of any deal approaching the size of Glencore, saw a 66% drop to US$34b.


Outlook – can “you first” become “me too”?
“The outlook for M&A in 2013 remains subdued,” says McCrostie. “There are a number of changes that need to happen for M&A to see a sustained pick-up and return to growth. Will we see them in 2013? It’s unlikely, but as with any market, sentiments can change rapidly.”


Five key things that need to change for M&A growth:
1. Sustained global economic stability and confidence in growth prospects. There has been greater stability around macro-economic issues such as the Eurozone, but would-be investors want to see this translating into an outlook for growth.
2. Long-term stability in equity markets. This would provide a more robust longer term view on valuations and prices.
3. Clarification on QE unwinding. The complex impact of the withdrawal of QE and its influence on the economy and equity indexes is critical to better understanding growth prospects and asset prices.

4. Greater shareholder influence on investments. Many large corporates have large cash piles, shareholders may want that money to be utilized and inorganic growth could be part of that equation.

5. Bold movers! Three-quarters of large corporate expect M&A to rise yet less than a third intend to do a deal themselves. The “you first” sentiments could turn into “me too” if we see some bold moves in the market and competitors are seen to be establishing an advantage through M&A.


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