Bankers are already looking to 2013 for a glimmer of hope as deal making remained stalled in the third quarter due to the widespread economic uncertainty that has kept companies from pursuing large transformative deals.
Global mergers and acquisitions volumes so far this year are down 17 percent. Announced deals dropped to $1.58 trillion world-wide in the first nine months of the year, down from $1.89 trillion in the same period last year, according to preliminary Thomson Reuters data as of September 18.
And larger deals - valued at $5 billion or more - fell by a sharper margin of 31 percent, a sign that companies are holding off on making big bets in the face of the euro zone's debt crisis, slowing growth in emerging markets, uncertainty ahead of the US presidential election and the pending fiscal cliff facing the US government.
"All those things are events and there are risks. And no one knows exactly how to estimate the probability of any of those events. I think they help make people more cautious," said Gene Sykes, head of global M&A at Goldman Sachs Group Inc.
"It's not so much what they fear in terms of events, it's simply the conditions in the world marketplace are such that there is no high-growth economy driving demand, and there are a lot of places where growth has slowed. Those things create a sense that we should be more cautious and that is reflecting itself in the overall level of deal activity."
Fundamentals are still in place to drive activity higher. Record cash on corporate balance sheets and cheap financing available for borrowers with both investment-grade and junk credit make M&A a highly attractive tool for growth.
US stock prices are also up - the S&P 500 index is up more than 15 percent so far this year, making companies more receptive to sales. But one of the key ingredients for deal making - CEO confidence - is still missing, bankers say. "When you look at the fiscal cliff, the presidential election and the European crisis, which clearly is still not resolved, those three concerns bundled together are really weighing on CEO and board confidence," said Jack MacDonald, co-head of Americas M&A at Bank of America Merrill Lynch. "To the extent that we can start to knock down some of those concerns, it bodes well for a favourable M&A market," MacDonald said. "Right now there's just so much uncertainty around what 2013 looks like that you haven't seen the follow through in M&A announcements."
Goldman Sachs was the top M&A adviser world-wide and Morgan Stanley took second place for the first three quarters of this year. The two banks held the same positions in the league table last year. Bankers see more slow months ahead as companies wait to see how the November election impacts US fiscal policy. "The biggest question related to the US election is whether and how the pending fiscal cliff will be addressed," said Gary Posternack, head of M&A for the Americas at Barclays Plc. "We are optimistic that, if we get greater clarity around domestic fiscal issues and some stability in Europe, we will see M&A activity pickup in early 2013."
He forecast roughly 10 percent growth in global deal volumes next year. M&A volume so far this quarter is down around 18 percent world-wide from the full third quarter of last year, according to Thomson Reuters data. Europe, reeling from the sovereign debt crisis, posted the sharpest percentage decline in quarterly deal volumes, while activity in the United States and Asia remained roughly flat from the third quarter of 2011.
European M&A volumes are down 41 percent so far this quarter to $84.2 billion, on track to become the slowest quarter for deal activity since the third quarter of 2002. The numbers could change substantially by the end of the quarter, particularly if EADS PA and BAE Systems Plc, currently in advanced merger discussions, come to an agreement during the month.
"I think you need to see maybe a bottoming out of Europe so people don't think Europe is continuing to decline. I think it would help that people feel (emerging) economies have stabilised as well," said Goldman's Sykes. "And I think the US, post-election, post fiscal cliff, so that you've gotten through the big uncertainty that are associated with those events. Then people are going to adjust to whatever it is. Even if we're in the middle of sequestration, people can adjust around sequestration and make more reasonable projections going forward."
The third quarter also saw a return of private equity buyers in the United States, as cheap financing fuelled appetite for deals of buyout funds looking to put money to work. US leveraged buyouts almost doubled in the third quarter of 2012 from a year ago, reaching their highest levels since the third quarter of 2007 - just before the buyout bust.
"Maybe we are seeing a bit of an upturn in the US, or at least the end to the bumping along the bottom. But that is about as optimistic you want to get right now," said Scott Bok, CEO of Greenhill & Co Inc. "Some of the uncertainty has been reduced in recent months. Europe doesn't seem quite to be in the difficult state that it was a few months ago. The economy is growing albeit slowly, the Fed is trying to prop things up," Bok said.
The energy industry has had more deals than any other sector so far this year, with around $188.3 billion of oil and gas deals. That is up 6 percent from last year. In July, state-controlled CNOOC struck a $15.1 billion deal to buy Canadian oil producer Nexen Inc - the biggest foreign take-over bid yet from resource-hungry China, as the country looks to build up its oil reserves.
Other hot sectors include metals and mining, food and beverages, and banks. Cross-border activity held steady with volumes down less than 2 percent at $660 billion so far this year, outperforming an otherwise sluggish market and reflecting companies' desire to gain access to higher-growth economies, crucial natural resources or new markets for their products.
Anheuser Busch InBev SA, the world's biggest brewer, is taking over Mexico's Grupo Modelo for $20.1 billion, giving it dominance in Latin America's second-largest economy and adding Corona to its brands. "Companies in more mature, lower-growth markets are looking to expand their presence in higher-growth emerging markets and conversely, companies in emerging markets are either looking for access to resources in other parts of the world, but also looking to gain access to markets and the customer base beyond what they have today," Barclays' Posternack said.
Japanese companies, led by trading houses, have also stepped up overseas acquisitions backed by a strong yen and flush cash reserves, driving M&A up 16 percent - one of the few major economies that saw a year-on-year increase in deal volumes this year. Itochu Corp announced a $1.7 billion deal this week to buy Dole Food Company Inc's businesses.
Japanese trading firms are keen to diversify their profit streams away from energy and mining-related businesses and 2012 also saw other high-profile cross-border deals such as Marubeni Corp's $5.6 billion deal to buy US grain merchant Gavilon.
Cross border deals have accounted for more than 40 percent of total M&A volumes for the past two quarters, which could signal an increasing appetite for risk among executives. "I actually think there's some cause for optimism, in terms of taking out some of these significant elements of uncertainty. I'm not saying the world is suddenly going to be a wonderful place, but the volatility I see declining and I think that's going to be good for M&A," said Citigroup Inc co-head of global M&A Peter Tague. "I think you actually could be starting next year on a much more positive note."
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