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Jun 30, 2009

M&A focus: No deal

M&A volumes hit a five-year low in April, with even distressed sales failing to take off.


This year, April was cruelly slow. In that month, global M&A volumes hit a five-year low, turning over just $113.4 bn of activity, the lowest monthly figure since September 2004.

So much for the wave of M&A activity predicted by many market commentators. True, deal activity in the financial sector has been high. But those tie-ups were mainly out of necessity and, in some cases, pushed through by strong government backing.

The only other sector to see much real activity is pharmaceuticals, which dominated the M&A market in the first quarter of the year, as the industry remains strong and has good cash flows. So it seems fair to ask: if the economy is so distressed, where are all the distressed sales?

Market participants point to several reasons: a lack of available debt for financing deals, the unclear outlook for the economy, and the fact that buyers and sellers won’t agree on asset prices. It’s also said that M&A activity tends to wait until earnings pick up before really kicking off after a recession.  

With all this in mind, we come to the latest M&A survey by the Association for Corporate Growth (ACG) and Thomson Reuters. The twice-yearly study speaks to hundreds of bankers, lawyers, consultants and private equity teams in the M&A world. Unsurprisingly, they’re a bullish lot. While sentiment is down from December, with 88 percent of respondents saying the state of the market is poor or fair, 56 percent still think deal activity will increase over the next six months.

The main reason for this likely increase is distressed sales taking off, according to the report. On CNBC’s Closing Bell, ACG’s vice chairman, Den White, echoed this sentiment. ‘There is a sense we’ve bottomed out in terms of M&A activity,’ he told the financial news channel. ‘I think our deal makers feel there will be an increase, the credit crunch is going to ease a bit and, in the coming quarter, there will be more distressed sales of firms.

‘In the short term there will be a lot of forced sales. Right now for companies experiencing difficulties, there are not many other options. For a company that wants to reorganize in Chapter 11, there is an extreme lack of debt financing. The thought of going into bankruptcy and out again is challenging, so for a distressed company, selling is one of the few options available.’

As White himself points out, however, big obstacles to deal making remain. ‘So far, not many people have actually pulled the trigger,’ he notes. ‘One of the big issues is that it’s very difficult to value a company and get the buyer and seller to agree in this kind of market where deal value is so uncertain.’

In one recent example, Johnston Press, a British newspaper publisher lacerated by falls in advertising revenues, looked like it could breach its banking covenants after failing to offload its Irish titles. Some newspaper reports put the amount being offered at only half the value sought by the company.

In addition, earnings outlook, another indicator of possible M&A activity, remains uncertain. And there are plenty of bears out there calling the rally that began in March one for suckers, with a second slump just around the corner. How cruel 2009 will ultimately be for earnings and M&A volumes remains to be seen.

Details correct at time of going to press.