Leading advisors on mergers and acquisitions are bracing for an extended slowdown in overall M&A activity over the short term, but do see some signs of activity for 2009, according to a new survey by international financial communications firm Brunswick Group.
More than two-third (69 percent) believe it will take up to five years to return to the level of M&A activity seen in 2007—up 28 percentage points from last year’s survey, reflecting increased pessimism about M&A in light of global economic conditions. But close to a third (29 percent) of respondents maintain there will be signs of recovery in “a year to 18 months,” down from 52 percent who shared that view in April 2008.
The second annual survey polled 59 of the M&A industry’s leading U.S. bankers, lawyers and other market participants on the year’s outlook and emerging trends.
Respondents cited two economic factors and one psychological factor as the top long-term challenges for M&A: lack of credit (39 percent), the slowing economy (26 percent) and lack of CEO confidence (26 percent). In addition, more respondents cited equity market decline as the greatest challenge facing the M&A market, up from 3 percent in the 2008 survey to 9 percent this year.
Asked about the likely impact of the stimulus package on the M&A landscape, respondents expressed cautious optimism. Forty-four percent believe the package will have a positive effect if the package is able to “restore confidence” and “ease credit.” Forty-six percent believe the package will have a neutral effect given doubts about whether it is sufficient and includes adequate “checks and balances to spur lending.” Ten percent of respondents thought the impact of the package would be negative.
“While advisors caution that recovery will take time, the survey indicates some areas where we can expect activity in 2009,” says Steven Lipin, senior partner, Brunswick Group in New York. "Lower company valuations as well as the potential impact of the stimulus package on both credit and confidence could drive domestic deals, especially in the healthcare and financial sectors, and prompt unsolicited transactions.”
Overwhelmingly, advisors agree that lower valuations will likely spark an upsurge of unsolicited deals (88 percent agree; 12 percent disagree). In addition, they view the decline in global stocks as likely to put U.S. companies on the defensive. Fifty-six percent expect that U.S. companies will be “the hunted” while 44 percent are optimistic that they will be “the hunters.”
Domestic transactions are expected to dominate M&A in 2009, according to 79 percent of advisors. Only 2 percent believe that acquisitions will be led by U.S. acquirers outside of the U.S.; and 5 percent by private equity. Fourteen percent expect that foreign acquirers coming in to the U.S.—largely from Asia and Europe—will be driving activity.
Respondents had mixed views on whether economic conditions favor foreign acquirers. The strengthening U.S. dollar is unlikely to be a deterrent to foreign buyers, say sixty-three percent of respondents. Nevertheless, tight credit remains the major obstacle for all acquirers. Almost half of respondents, or 49 percent, believe credit restrictions remain tight, while 39 percent see signs of loosening. Topping the list of sectors considered ripe for consolidation are healthcare (25 percent), financial services (24 percent), energy (15 percent) and consumer goods/retail (14 percent).