Markets & Finance

Conditions Are Ripe for an M&A Boom in 2011


Corporations have the cash and motivation to go back on the hunt for acquisitions after a long drought

Conditions that facilitate mergers and acquisitions are changing—positively, dramatically, and rapidly. Corporate boardrooms are once again abuzz with discussions regarding the next deal. After several years in which worldwide M&A activity dropped steeply, 2010 was a recovery year both worldwide and in the U.S.—but it looks like corporate dealmaking could really roar back into the headlines in 2011. Many of the largest global companies appear ready to make one or more major acquisitions in the year ahead. That may be good news for shareholders: Studies have shown that M&A deals struck during soft economic periods yield higher returns than those completed during economic booms. While some companies may continue to be reluctant to proceed with acquisitions until conditions are perfect, opportunities for those that do proceed could be greater, because less competition might translate into reasonable prices for target companies. So why are companies again focused on making acquisitions? While every deal is unique, a few key themes have emerged as M&A activity has picked up since the summer. Deals at the moment are highly strategic while also focusing on short-term revenue and profit growth. Acquisitions can be an effective strategic tool to accelerate growth in both revenue and market share. Companies understand that acquisitions can provide access to markets, products, and technologies that might otherwise be available only after many years of significant capital investment. Wallowing in Cash

Large corporation clearly have the means, motive, and opportunity to make large acquisitions in 2011: MEANS: The largest global public companies have more than $3 trillion in cash reserves on their books, and that is growing every day. In addition, these companies have access to trillions of dollars in debt financing that is currently available at extremely low rates and on very favorable terms. MOTIVE: After almost three years of difficult economic times, companies are seeking growth. If organic growth is not available to them in the current slow economy, then an acquisition can provide it. In addition, companies have been able to identify their weak spots during the recession, and acquisitions are an effective means of filling those gaps. OPPORTUNITY: Given the length and severity of the economic downturn, many companies have not performed as well and are therefore for sale, shedding assets, or vulnerable to an unsolicited bid. Activist investors are more than happy to push these companies toward a deal. Of course, companies must also have confidence in the overall economy as well as the desire to pursue a significant acquisition. Signs are that confidence is returning: According to a survey of 150 global businesses conducted by Thomson Reuters and Freeman Consulting, worldwide M&A activity is forecast to increase 36 percent in 2011. Similarly, a recent mergermarket.com survey showed that 82 percent of U.S. business executives and 87 percent of European business executives expect increased M&A activity over the next 6 to 12 months. Not only will corporations be doing deals in 2011; private equity groups have also become increasingly active in the past few months, and they will likely continue to be busy. Enter Non-U.S. Buyers

What sort of transactions can we expect to see? Sectors where M&A activity is likely to be quite strong include energy, mining, health care, and technology. In addition, look for significant transactions in the consumer product and financial service sectors. Real estate M&A activity may also see a revival. We will probably also see more airline deals in the wake of the recent hook-ups. Crossborder deals will figure to be a hot spot, with acquirers from Asia and Brazil particularly active. A few notes of caution are warranted. With lingering high unemployment in the U.S. and elsewhere, the recovery will probably remain fragile and somewhat restrained. The sovereign debt crises in Europe are not fully resolved, and a significant default would have negative effects on the euro and unsettle global capital markets. Since business confidence is an essential ingredient for sustained M&A activity, anything that suggests the recovery is at risk could bring dealmaking to a screeching halt. If business confidence is maintained, however, M&A activity will likely reach its highest levels since 2007.

Aquila is a partner in the Mergers Acquisitions Group of Sullivan Cromwell LLP.

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