Corporate mergers and acquisition (M&A) activities are perking up, especially in the real estate, energy and power, and advanced technology sectors.
Also, analysts are predicting that the automotive sector will come back stronger than before the economic crisis.
Overall, M&A dealmakers suggest that 2010 will be a productive year for acquiring companies, but it still won’t come close to the record-breaking 2006 in numbers or value.
Companies have hoarded cash through cost cutting, reduction in force, and slimming down since the onset of the economic crisis. Traditional growth has taken a backseat to acquiring new companies over the past 20 years.
Liquid assets are not used to improve existing operations, but to support M&A. “Much of this money is overseas, and the tax implications for offshore deals are favorable. Among the companies involved: Microsoft and Cisco with $40B each, Google with $33B, and Oracle with $25B,” according to Beyond the Arc, a business analysis website.
A main driver in the M&A sector is increased confidence by investors, given the uptick in the credit markets, improved technologies, increased productivity, and more clearly defined regulations.
“Although the deal volume flatlined for the year that ended November 2010 as compared to 2009, deal value rose nine percent to $786 billion from $722 billion,” according to a report on the Big4 website.
During 2010, a total of 106 deals were completed in the U.S. and 74 deals are still in the pipeline.
After the third quarter, global M&A activity increased by 6.8 percent over the second quarter in 2010, representing a value of $599 billion. When compared with the third quarter in 2009, M&A activity jumped by 25.6 percent.
“The M&A market is continuing to roar. And with Q3 2010 M&A preliminary figures now out, the evidence is more than anecdotal,” according to an article on the Risk Watchdog website.
U.S. dealmakers have taken the lead and represent 34 percent of all global activities. Emerging markets are outpacing Europe when it comes to M&A activities, but they rarely leave the confines of the European market.
Europe’s M&A activities took a nosedive and dropped by 15 percent or $25 billion during the third quarter in 2010.
“Europe’s poor M&A performance is in fitting with BMI’s [in]-house view that the eurozone is set to remain the weak link in the global economy going forward. In Europe, dealmaking came off the boil in Q3 2010,” according to the Risk Watchdog article.
U.S. M&A Activities Dissected
“The downturn in the credit cycle from mid-2007 through mid-2009 had a tremendous impact on both the overall volume of U.S. strategic M&A transactions and the contractual devices employed by deal makers,” according to a study on lessons learned during the economic crisis by the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP.
M&A dealmakers experienced a relaxation in the credit market, but a decline in the dollar amount of the deals made—from $425.4 billion to $313.4 billion between July 2010 and July 2009, when compared to the 2008 and 2007 period.
During the past three years, firms involved in M&A activities discouraged any other firm from partaking in the takeover of any company slated for M&A. M&A participants demanded increasingly more breakup fees, topper fees, or reverse breakup fees. The only overriding reason for a firm not to call for the fees is related to the fiduciary responsibilities of the target board of directors.
Breakup fees require the firm to be purchased to pay a large sum of money to the investment company if it should agree to be purchased by another company. The topper fee is a penalty fee if the purchaser is another company that offered a higher purchase price. The reverse breakup fee requires the investment firm to pay a penalty if it can’t put together the financing for the acquisition, and thus the deal falls apart.
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