NEW YORK: After a drought of nearly three years, deal makers are optimistic about 2004, hoping that an improving global economy and companies need to expand markets and widen product offerings will boost mergers and acquisitions (M&As) worldwide.
For most deal makers, including Wall Street investment bankers, the last three years have been brutal, with a weak US economy, battered stock markets and a wave of corporate scandals bringing corporate deals to a grinding halt.
Activity has picked up, however, in the last few months, especially since the end of the Iraq war. Bankers say clients are more willing to talk about doing deals.
My sense is if you look at the activity level in the last six months, post-Iraq war, chief executives confidence has increased perceptibly, and there is a different tone to the marketplace, said Paul Taubman, a global co-head of M&As at investment bank Morgan Stanley.
Statistics seem to support Taubmans assessment. According to Thomson Financial, worldwide M&A activity has totalled US$1.26 trillion so far this year, up from US$1.19 trillion in 2002. In the United States, a traditional hotbed for deals, the value of transactions has risen to US$490bil this year from US$432bil last year.
Experts say macro-economic conditions necessary for a firm deal-making environment are returning. Improved corporate earnings, robust equity markets, the increased availability of financing, and a renewed focus on growth have spurred CEOs into deal-making mode.
Investment bankers and merger advisers mention financial services, healthcare and manufacturing as ripe for consolidation.
In the United States, where the financial services industry is viewed as fragmented, deals involving banks and insurance companies comprised one-third of total M&As in 2003. With the prospects of rising interest rates eating into net interest margins, banks and insurance companies with strong balance sheets are expected to shop for rivals.
A major factor expected to drive M&A activity next year is the availability of ready finance from banks, says Bob Filek, a transaction services partner at PriceWaterhouseCoopers.
He estimates that US banks have seen a US$1.3 trillion decline in mortgage applications in 2003 and would look to offer that money to deal-making clients.
Until recently, banks would not lend more than 2 to 2.25 times a takeover target companys earnings. Today it is north of three, Filek said.
After a spate of corporate scandals, CEOs are treading cautiously in choosing target companies, as opposed to the go-go days of the 1990s, when companies often overpaid for acquisitions and destroyed shareholder value.
You will not have crazy acquisitions done at crazy prices. It will be a quality-driven marketplace for good acquisitions in industries where consolidation makes sense, said Louis Bevilacqua, co-chairman of M&As at New York law firm Cadwalader, Wickersham & Taft LLP. Reuters
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