Is M&A on a Slow Upswing?

(page 2 of 2)

The panic of late 2008 and early 2009 is over, says Paul Schneir, an investment banker at Keybanc Capital Markets. Executives and corporate boards are starting to think about ways to boost earnings through acquisitions, he says. Many companies are beginning to make strategic moves, says Brian P. McDonald, an investment banker at Houlihan Lokey. Boards and CEOs are asking themselves: "How do we best position ourselves coming out of a recession?" he says.

Many companies are looking at selling off business units—either to refocus their companies on core units or to raise capital, McDonald says. "There is a lot of pent-up demand and a lot of pent-up supply," says Howard Lanser, an investment banker at Robert W. Baird.

caution and due diligence take time

So if conditions are improving and negotiations are happening, why are there so few deals being announced? One factor preventing a strong resurgence of M&A activity is that negotiations are going much slower than in the past, experts say. "Deals are taking more time now than they did in headier times," Pierce says. "People are being more careful, more cautious. They're certainly doing more homework." And while credit markets have improved, banks are still wary about lending and are taking their time in approving loans to acquirers. "It's a lot harder to find financing than it was in the past," McDonald says.

The vast majority of acquirers remain companies, not private equity firms, because private equity can't get the financing to complete big deals, says Schneir. He does see private equity shops working on smaller transactions, often worth less than $250 million. As long as the economy and the markets remain on sound footing, Lanser expects many M&A transactions now in process to be announced eventually, perhaps later in 2009 and early 2010.

The beginning of the year saw many M&A deals focused on recession-resistant areas such as health care. The Marvel and BJ Services deals show that activity is now broadening to other areas of the economy. Expect that to continue, Lanser says, as long as the economy does not dip back into recession. For dealmaking to happen, stability is key. "Nobody expects the economy to come shooting out like a rocket," Lanser says. "As long as the economy doesn't nosedive, we'll be O.K."

Deals in the pipeline suggest that autumn and winter could be busy times for M&A. But buyers and sellers remain skittish. After the turbulence of the last two years, dealmakers know that a return to Merger Mondays could very easily be derailed by yet another round of bad news about the economy or the financial system.

Steverman is a reporter for BusinessWeek's Investing channel.

Business Exchange

Track and share business topics across the Web.