So say the prophets at UBS. So don’t panic.
European M&A may have dried up sharpish in late-July and showed few signs of a sustained come-back since. But the Swiss bank’s analysts believe that all is not lost. It’s not exactly ‘dealmania’, but they say don’t write off good old-fashioned deals between companies just yet.
Few public-to-public deals have been pulled, and we are not surprised CEOs are deferring what are key decisions. Our analysis of M&A during the US S&L, and LTCM/Russian debt crises suggests it is too early to write off corporate M&A.
In both these historical crises, argue UBS, corporate Europe came out relatively unscathed. Looking month by month through 1998 just demonstrates the lumpy nature of corporate deal making, with volumes dipping as the Russian debt crisis and then LTCM hit. When uncertainty prevails, deals stay in the pipeline – but may not remain shelved for long if calm is restored.
Even the LBO will make a come-back, says UBS – though within new financing restraints. Cov-lite is a thing of the past.
Previously, it was widely thought that it was feasible to finance an LBO in the €40-50bn range. In the current conditions digestible deals are more around €3-4bn or less, with the maximum being c€7bn.
But after all, the buyout groups are sitting on funds of record proportions – and both fund-raising and LBO volumes are likely to find support from funds flowing forth from the Middle East. Arcapita, a Bahrain-based firm which last month acquired German company HT Troplast for €775m, has 1,200 mostly Arab investors, and in the past 10 years has done 60 LBOs worth $19bn, notes UBS.
Of course, what does put an end to M&A activity is a stock market (as opposed to credit) panic and/or something that feels like a good old fashioned recession — as this chart from UBS seems to illustrate. In that respect, we suspect M&A bankers will be glad to get October out of the way.