At the current run rate, M&A volumes this year will fall below the total’s for 2006 and 2007. But are we on the brink of a precipitous fall in deal-making?
Citi thinks not - and argues that equity investors should be comforted at the reduced flow of deals, with $983bn this year to the end of April. Periods of over-valuation have tended to be associated with record levels of M&A, while times of weak activity have generally proven buying opportunities.
Looked at relative to global market cap, say Citi, 2007 was not as overblown as it felt, and at 6.5 per cent activity so far this year is close to its weakest level in the last decade.
The argument that the bank is making is one advanced even in the first half of last year. 2007’s M&A boom was less reliant on over-hyped equity valuations than its turn-of-the-century predecessor. Heightened levels of M&A last year, in conjunction with ever-tighter spreads, gave a sell signal for credit rather than equities.
Citi concludes:
We expect activity to recover from current levels. Stronger levels of M&A are consistent with a maturing of the bull market. Importantly, we believe the nature of M&A will change. Investors should expect less debt financed bids and more equity. M&A should no longer be dominated by private equity but by large companies instead. Also, companies will be on the lookout for potential growth and/or cost-cutting opportunities as the macro backdrop becomes less supportive.
