Merger And Acquisition Bust?

by: John M. Mason

"M&A Slumps to Lowest Level Since Financial Crisis's Nadir."

This headline, in my mind, says a lot.

For over three years I have been expecting a boom, or, at least a boom-let, in merger and acquisition activity.

The pieces were all in place. We were coming out of an economic downturn that was severe enough to be called "The Great Recession." There were large companies that were in very good shape and there were other, large- to medium-size, companies that were hanging on. Interest rates were ridiculously low, and many of these large corporations had tons of money on hand.

All we needed was more confidence in future economic growth and more confidence in the political and regulatory environment. Everything seemed to be in place.

The problem is that the M&A business never picked up and now we hear that the level of M&A activity has receded to the amount that took place in the third quarter of 2009.

But, the third quarter of 2009 was the first quarter of the new economic expansion. The Great Recession ended in the second quarter of 2009. And, the large corporations that had tons of cash on hand in the third quarter of 2009 still have tons of cash on hand today. According to Bloomberg, "Companies have announced $446 billion of takeovers since June 30, the smallest amount since the third quarter of 2009." In fact, Bloomberg estimates that for the full year of 2012, M&A activity will come in around $2 trillion. This total is approximately 15 percent below 2011 and is the lowest level of activity in three years.

What's going on?

Well economic growth has been exceedingly slow over the past three years and world growth is expected to be even slower in the coming year. Everyone seems to be revising economic growth projections down.

In addition, Europe is nothing more than a mess. The leaders of Europe are not able to get their act together. Cash seems to be going to sovereign nations receiving aid packages and banks that are having solvency problems. There is still massive uncertainty about the ability to the European Union to come up some kind of comprehensive plan to integrate its banking systems and to build a fiscal union. This is having a very negative effect on the "pace of deals" on the continent.

Furthermore, Asia has not been as active as people believed it would be. Although Asian buyers initiated about a third of the deals done in the quarter, according to Bloomberg, this is still much less than expected out of the area. Asia is also experiencing a slowdown in economic growth and the government of China is going through a change in leadership and this seems to be impacting business and creating some uncertainty about the future.

As I wrote above, I have been expecting much more activity on the M&A front over the past three years. I have looked for the M&A pickup to signal that the economy was growing in strength.

My reasoning was that these large corporations had accumulated all of this cash on their balance sheets to pick up "wounded ducks", companies that were a little bit on the financial edge, as the economy began to gather up strength and uncertainty began to lessen. In preparation for this even companies like Microsoft, who had never issued long-term debt before, went to the financial markets with to build up their cash reserve. The interest cost of this new debt was "inconsequential."

The M&A boom that I expected never materialized. We hardly got any bump at all. And, now activity has dropped off to where we were at the end of the Great Recession.

I take this information as a leading indicator of where we are in the world, economically…and politically.

Europe is in a recession and economic growth in the rest of the world seems to be slowing. Leadership is nowhere in sight anywhere in the world. Rules and regulations and regulatory bodies are all in transition with no real idea of where things are going.

Would you want to commit to a large acquisition in such an environment?

I still believe that we need to keep an eye on M&A activity. If it picks up then that will be a sign that large corporations are becoming more confident about the future and the business situation. This I would take as a "good sign" that business confidence is improving, something that is desperately needed for economic health.

If M&A activity continues to languish then this will be a sign of continued economic malaise and/or of a further absence of governmental leadership. It will indicate that there still is a ways to go before the economic and political climate improves. It could also indicate the possibility that we could face even worse times.

So, keep an eye on what is happening in this area.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.