Following the declined levels of Canadian and worldwide M&A activity experienced in Q1 2013, the big question for Q2 results was whether deal-making levels would continue to lag behind the 2012 numbers. Houlihan Lokey, a global investment bank, recently released its M&A Market Overview report for the first half of 2013, confirming some of the analysts’ negative expectations. Houlihan Lokey reported that global M&A was down 18% in value and 14% in volume year-over-year. The US market experienced a more modest decline of 3% in volume, while transaction values increased 29%, largely as a result of several mega-deals announced earlier in the year. On an annualized basis, Canadian M&A was also down over 10% in volume, and over 30% in value. Canada-US cross-border activity was also down (for a detailed review of activity in the Canadian market, see Trevor Zeyl’s post on this blog).
M&A activity was spread relatively evenly across the Americas, Europe, and Asia (including Africa & the Middle East). The healthcare sector dominated activity in the Americas, with energy and power a close second, while industrials and real estate saw the most deals in Europe and Asia, respectively. Cash continued to be the predominant form of consideration, being the choice form of payment in 80% of transactions valued at over $500 million US. On an annualized basis, there has been a modest increase in hostile and unsolicited bids.
In more general terms, market outlook continues to be cautious. While American corporations hold more cash than ever before, uncertain economic and political conditions seem to be holding back acquisition spending. Among other familiar culprits are lukewarm growth in the United States, as well as the decline in economic growth in China and its expected effects. As the Houlihan Lokey report points out, although M&A activity normally recovers two to three years following a downturn, that has not been the case since deal-making plunged in the wake of the global financial crisis. In fact, activity has stayed relatively flat since 2009, with the only increase being 2010. If the current pace of acquisitions continues, 2013 will mark a second consecutive year of declining activity.
However, there may yet be reason for optimism. As Houlihan Lokey notes, “disparities across regional economies could trigger opportunistic deals.” At the same time, borrowing costs remain at historic lows, although it is unclear for how long this will continue. Further, there remains an expectation that private equity activity will increase in the near future. According to Houlihan Lokey, a continuing pressure exists for vintage funds to deploy capital. There is a “need for [financial] sponsors to put an estimated $150 billion of excess capital to work by year end.” At the same time, on the sell side, “high valuations secured for quality companies in the second half of 2012 have motivated others to test the market.” The combination of these and other factors may create positive movement in M&A market activity.
Turning to trends in public transaction terms, the Market Overview indicates an increase in the use of “Go-Shop.” Reverse break fees are also continuing to increase in popularity, the proportion of transactions with such terms in the first half of this year surpassing the previous high observed in 2007.