For the first time since the start of the crisis, mergers-and-acquisitions bankers can look forward to the New Year with a degree of optimism.
Again, 2010 was a modest year for deal making, with global announced volumes up 18% to $2.76 trillion, according to data provider Dealogic. That is well below 2007's $4.6 trillion peak, but a flurry of bids since the summer suggests corporate chiefs are rediscovering their animal spirits.
True, the M&A recovery in 2010 promised more than it actually has delivered. Some of the biggest bids, such asBHP Billiton's $40 billion hostile bid for Canada's Potash Corp. of Saskatchewan, were abandoned. Others, including Sanofi-Aventis's long-running pursuit of U.S. biotech company Genzyme, still are talking, while some, like Vimpel Communications' $21 billion bid for Italy's Weather Investments, have yet to close. One feature of 2010 deal making was the increased regulatory and political risks facing cross-border transactions.
But the conditions for an M&A recovery are in place. Almost one-third of the European market trades below 1.1 times replacement value, according to Credit Suisse estimates, implying it is as cheap for companies to buy companies as to build their own new capacity. And corporate cash piles, which earn virtually nothing in the bank, are rising. Almost 30% of U.S. companies have net cash. What's more, U.S. corporate free-cash-flow yields are more or less in line with investment-grade corporate-bond yields compared with a 20-year average of 5.5% below, according to Credit Suisse. That suggests deals will just about fund themselves.
Buyers also are returning. Private-equity firms announced $184 billion in buyouts this year, up 74% from 2009's lows, notes Dealogic. Buyout firms have roughly $450 billion in uncommitted funds. The bond market also is supportive: High-yield bonds now yield just six percentage points over government debt compared with 20 percentage points at the height of the crisis. Emerging-market bidders also are active. Emerging-market M&A surpassed Europe for the first time in 2010, and is likely to do so again in 2011.
The snag is confidence. Sure, signs are encouraging. Unsolicited bids accounted for 8% of global M&A this year, a 10-year high, notes Ernst & Young. Price discovery also is improving, as evidenced by $275 billion raised in initial public offerings globally this year, the second highest on record after 2007. But investors still are skittish, nervous about the state of the global economy, particularly given the euro-zone sovereign-debt crisis. That points to more midmarket acquisitions than a rash of big strategic deals.
After the last three years, most bankers would happily settle for that.