There is certainly no dearth of deal appetite, writes the FT’s Lina Saigol on Thursday. Having spent much of the last downturn repairing their balance sheets, companies are in better shape than they have been for a long time and, with an abundance of cheap credit available, they remain keen to participate in global consolidation.
Investment bankers report that dialogue with chief executives is still lively and that their new business pipelines are full. Tony Burgess, joint global head of M&A at Deutsche Bank, says the deal activity taking place now remains soundly based. “We do not see a bubble,” he says. “On the contrary, we expect this heightened level of M&A activity to continue on for some considerable time yet.”
Indeed, unlike during the 2000 merger boom, there are still a number of large-cap sectors where the inevitable consolidation plays have not yet occurred, the FT says. These include banking and insurance, oil and gas and pharmaceuticals. “Another sign of the health of the M&A market is that cash is still the favoured acquisition currency. The kind of value-destructive deals typical of the dotcom bubble were characterised by share-based transactions, as companies used their inflated stocks to fund their deals.”
So far this year, cash deals account for 74 per cent of total M&A compared with seven years ago when cash accounted for only 37 per cent. That does not even include deals being done by private equity, which, if David Rubenstein, a co-founder of Carlyle is eventually proved right, will include at least one $50bn buy-out this year and a $100bn deal in 2008.
A degree of caution is also creeping in that bankers believe could help sustain the three-year bull market for some while longer. Meanwhile, the surge in mergers and acquisitions activity in Asia’s financial services sector is set to continue for the next five years in spite of mounting concerns over rising valuations for assets, according to a survey published on Wednesday, the FT reports.
Three-quarters of the 230 Asia-based financial services executives surveyed by PwC forecast that their organisation will be involved in further significant M&A activity in the coming five years compared with two-thirds in the inaugural survey in 2005.
Half of those surveyed said the biggest barrier to deal-making was rising valuations, an issue cited by 32 per cent of executives in the 2005 survey. Regulatory restrictions and lack of attractive targets were other hurdles mentioned.
However, more than three-quarters of respondents said they expected to strike joint ventures and partnerships as one way to get round high valuations and regulatory hurdles in certain markets. According to the survey, China remains the most popular hunting ground, with 47 per cent of executives looking to invest in the mainland in the coming five years, followed by India at 39 per cent.