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By Matthew Quinn
For the second half of 2009, deal activity has remained sluggish but is showing signs of modest acceleration, Ernst & Young said in its 2010 M&A outlook released on Monday. The deals that do get done, however, will be significantly different in how they’re financed and executed.
“The new ‘normal’ is defined by continuing uncertainty, weaker demand and margin erosion, scarcity of capital and more risk-aversion in strategic decision making,” Ernst & Young said in the report.
Still, M&A should continue to improve in 2010 after grinding to a halt at the end of 2008. The pharmaceutical, biotechnology, health care, financial services (asset management in particular), media and entertainment, energy and software and services sectors are expected to be the busiest areas of deal making.
Ernst & Young found that 25 percent of the businesses it surveyed said they are likely or highly likely to make an acquisition in the next six months, rising to 33 percent in the next 12 months and 41 percent over the next 12 to 24 months.
The major hindrance to deals in 2009 has been credit. E&Y said that 62 percent of the companies it surveyed cited insufficient financing as a major issue preventing deals from getting done. In response, E&Y is seeing a rise in non-traditional deal structures, including the use of seller paper to close the deal and the use of private placements for cash infusions. Half of those surveyed are exploring alternative sources of funding and an additional 25 percent are considering doing so.
Further slowing down deal making has been the tendency of companies to hoard cash in response to the financial crisis. E&Y noted that companies are holding on to more cash -- and a greater percentage of assets in cash -- than at any time in the past 40 years, citing a Wall Street Journal report from November 2009.
The lack of access to credit and careful cash management means deals will likely be smaller for some time to come. E&Y said, “The $5 billion or more mega deals of previous years will now most likely be few and far between.”
The firm said only 145 completed deals broke the $1 billion mark over the past year, versus 400 in 2008 and 609 in 2007.
Additionally, companies are putting potential deals under the microscope, further highlighting the new risk-averse economy. Fifty-three percent of those surveyed said they are conducting more rigorous due diligence.
But many companies still view acquisitions as important to their growth prospects, particularly overseas. Fifty percent of those companies considering acquisitions are doing so in order to enter new geographic markets, E&Y found. Emerging economies, which are expected to grow by 5 percent in 2010 versus 1.25 percent growth in advanced economies, are particularly appealing to companies trying to achieve growth in an otherwise flat market. Brazil and China are receiving the most attention from would-be deal makers.
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