Where Have All the M&A Deals Gone?
By all indications, mergers and acquisitions should be booming right about now. Corporations are sitting on mountains of cash--Apple alone reported a stockpile of $117 billion in its most recent earnings. What's more, credit couldn't get much cheaper. And a quick scan of recent headlines shows companies such as Yammer and Instagram selling for hearty sums.
Yet total M&A activity in the U.S. fell off a cliff in the first half of 2012, with the number of deals down 20 percent compared with the same period last year, and nowhere near the level it has been over the past five years. It's even worse globally, with deal volume down about 25 percent in the same time frame and lower average deal values.
There are two key factors playing a role in the slowdown, says Steve Krouskos, a partner at Ernst & Young whose department advises buyers and sellers on mergers and acquisitions. One is that companies have been shedding parts of their businesses that aren't core to organic growth. That means the days of growth by acquisition appear to be over--at least for the time being. Second, many of the most common, low-profile deals in sectors such as industrial products, real estate, and financial services have dropped off.
But the silent killer in the M&A world is uncertainty. In addition to continuing worries about Europe and daily fights between the U.S. presidential candidates about the future of tax policy, executives are most concerned about what's happening in China, says Thomas Herd of Accenture; he consults with buyers and sellers on mergers and acquisitions.
"Not only have you seen an economic slowdown, but the Chinese Communist Party will transition to a new leader this fall who will determine where the country goes next," Herd says. Many large would-be buyers are worried about their supply chains. "It's the biggest factor that's inhibiting M&A growth, and yet it gets the least amount of attention," he says.
Despite the headwinds, Herd says he expects better days ahead--if only because the market can't get much worse.
Steve Joiner, a regional managing partner at Deloitte, oversees teams that conduct due diligence in the early phases of deals for both buyers and sellers. As a result, he often gets a sneak preview of acquisitions that are in the pipeline. Though he won't disclose details, he has seen an uptick in companies exploring deals recently. "That said, there is a lot of caution out there," he says. "Companies want to ensure that shareholders and their boards see an immediate gain. Buyers are being much more thorough in their analysis than in the past."
Still, the news isn't all bad for entrepreneurs looking to cash out. The bulk of purchases being made are for companies in the $50 million to $500 million range. A few sectors have fared relatively well, including technology, health care, and energy. In the tech sector, companies with high-profile brands or cutting-edge products have been the most attractive buyout targets. (Authentec, a maker of mobile security technology, was acquired by Apple for $356 million; Frommer's, the travel-guide publisher, was acquired by Google.) In the health care and energy sectors, Joiner and Herd say there has been a significant amount of industry consolidation that they expect to continue.
Plus, though Google may not come begging to purchase any companies for billions anytime soon, many corporations are still making bold strategic investments in start-ups. Look at Starbucks's recent $25 million investment in Square, which in one fell swoop doubled the payment processor's valuation, to $3.25 billion.
In addition, the down market may provide opportunities for entrepreneurs to grab up some valuable brands. Experts point out that with major companies shedding noncore divisions, it won't be long before some household names come on the block with attractive price tags.
"All of the fundamentals are positive, and I think there is a lot of pent-up demand," says Krouskos. "Nevertheless, we won't see much new activity until some of the volatility and uncertainty in the markets fades away." And when that day comes is still anybody's guess.