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26 February 2024

Corporate deal-making hit by crisis


The global financial crisis put a dent in corporate dealmaking in 2008, and activity will likely be subdued in 2009 with many deals being "mergers of necessity", analysts said.

Global merger and acquisition (M&A) volume fell 28 per cent in 2008 to a total value of $3.33 trillion (Dh12.22trn) following a record year in 2007, according to research firm Dealogic.

The fourth quarter was especially weak, with mergers down 36 per cent from the same period in 2007 to $651 billion, the firm said in its 2008 report.

Moreover, a record 1,362 planned deals were scrapped in 2008 with a total value of $923bn, Dealogic said. BHP Billiton's withdrawn bid for Rio Tinto, at $147.8bn, was the largest ever deal to be withdrawn.

A separate report by PricewaterhouseCoopers pointed out that financing has become a problem for big corporate deals due to the global credit crisis.

PwC said in the first 11 months of 2008 the number of mergers and acquisitions worldwide was 8,190, a 22 per cent drop from the same period in 2007. "There's just no credit out there," PwC partner Greg Peterson said. Potential acquirers "just can't finance anything", he said.

Even if firms seek to use their stock for an acquisition, Peterson noted "the value of the shares has dropped substantially and they would have to use so much of their stock in a takeover".

Potential takeover targets are also wary, he noted: "They don't want to take stock" instead of cash, limiting the likelihood of deals.

At the start of 2009, the few mergers being worked on are deals aimed at helping distressed companies survive, PwC noted.

"Troubled companies will look to align with larger, stronger players in order to survive, creating the perfect storm for mergers of necessity," said PwC partner Robert Filek.

Even venture capital deals, which often fund start-ups and technology deals without borrowed funds, have been hurting as investors step back in the face of market turbulence.

The National Venture Capital Association cited 260 mergers and acquisitions in 2008, the first year since 2003 when there were fewer than 300 venture-backed acquisitions.

The group cited only six venture-backed initial public offerings (IPOs) of shares in the year, with a value of $470 million, compared to 86 IPOs in 2007 with a combined value of more than $10bn.

"The IPO market virtually shut down in the second quarter," said Emily Mendell, vice-president of the NVCA.

"The acquisition market is impacted by how healthy the public markets are, and we began to see problems in the third quarter."

"We're hoping the market will reopen in late 2009 or early 2010," Mendell added. "The market needs to stabilise, investors need to regain some confidence. It going to be a year of survival and those who do survive will do very well."

Private equity deals, which may use borrowed funds, also faced troubles.

According to Dealogic, private equity deals fell 71 per cent in 2008 to a total value of $658bn, with no deals worth more than $5bn. The fourth quarter was even worse, with a 84 per cent drop.

Cancelled private equity deals amounted to $132.3bn, including the whopping $48.5bn acquisition of Canada's BCE Enterprises, which was scrapped last month.

Some of the gap was filled by sovereign wealth funds, which accounted for $56.7bn in 2008 deals, slightly above 2007 levels. The largest deal was the $12.5bn investment in Citigroup by a group that included Singapore's and Kuwait's sovereign funds.

There is little to suggest an immediate return to the heady period of dealmaking, PwC's Peterson noted. "The dealmakers believe we may not have hit the bottom, and if unemployment continues to go up and business transactions continue to go down it may be wise to wait," he said.