Thomson Reuters recently released its Q3 Mergers & Acquisitions Review – Financial and Legal Advisory Review. Overall, worldwide M&A totalled US$455B, but was down 16% from 2011, with quarterly activity down 13%. The United States was the biggest contributor to Q3 M&A activity, accounting for 43% or US$195B of the worldwide total.
Despite the general decline in M&A activity, there are some figures to be hopeful about. Cross-border M&A activity totalled US$678.9B during the first three quarters of 2012, accounting for $41% of overall M&A volume and down just 1% compared to the first three quarters of 2011. The energy & power sector was most active during the first nine months of 2012, commanding 17% of announced M&A, while the materials and financial sectors accounted for 12% and 11%, respectively. M&A activity involving Asian companies increased 6.8%, to US$342.3B, up from US$320.5B in 2011, with deals in the energy and power sector driving this increase.
M&A activity with Canadian involvement increased by 36.3% in terms of announced deals as compared to the first three quarters of 2011, but completed activity fell by 10.1% during the same period. With respect to deal count, both completed and announced M&A activity with Canadian involvement decreased, by 18.1% and 14% respectively.
The downturn in Q3 is largely reflective of an ongoing aversion to risk that is pervading corporate boardrooms. According to the Ernst & Young: Global Capital Confidence Barometer report, appetite for M&A among senior executives has fallen from 31% to 25% since April. This is due, in part, to “unstable economic conditions and concern over valuation gaps.” Companies that hope to engage in M&A activity are increasingly looking at smaller deals. According to the Global Capital Confidence Barometer report, ”more than 80% [of executives] say that they will do deals worth less than US$500M, and 38% say they will do deals under US $50M. This suggests that, where deals are being considered, they will extend existing businesses and fill strategic gaps.”
A curtailment of M&A activity has also impacted the way businesses are being sold. According to the Financial Times, the auction process, which once held an automatic claim as the best way to sell a business, is no longer responsive to the changing landscape of M&A. Specifically, decreasing levels of M&A activity have created a buyers’ market and, as a result, big buyers are increasingly influencing the acquisition process. According to the Financial Times, “the timetable and due diligence process – both of which were carefully controlled by the seller in an auction environment, have become more determined by the buyer.” The auction process does not account for this shifting power dynamic and is no longer the best way for a seller to maximize on the competitive tension between bidders.Therefore, so long as the buyer’s market remains, it would be prudent for sellers to reconsider the use of the auction process and explore alternative ways of disposing of their business.