How are the European and US Sovereign Crises Affecting M&A?
The sovereign debt crises affecting the US and Europe have undeniably had a far-reaching impact on merger and acquisition activity in these regions, but will things improve in the near future?
Data from mergermarket shows that emerging markets have seen far more activity than more established markets in Europe and the US, with regard to M&A. Worldwide, deals were up just 2.9 per cent in the first half, while they were up an impressive 44 per cent in emerging economies.
The second quarter of 2011 was particularly tough for Europe, with M&A activity falling to levels lower than they have been since 1998. M&A activity in the US also slowed in the first six months of 2011, totaling just $313.3 billion, down 18.8 per cent from the year before.
It is clear from these figures that dealmakers have been demonstrating caution in the face of uncertainty. Citigroup’s European head of M&A, Wilhelm Schulz, told the Financial Times, “The gun is loaded, but in light of recent market volatility, boards are reluctant to pull the trigger.” Several other industry experts told the FT a similar story and claimed that the outlook looked even less positive for the coming six months, as confidence in the recovery remains low.
However, a recent Reuters report on investment bank Lazard, claimed it had a good second quarter, reporting a rise in fees from its work with M&A deals. The firm generated second quarter profits up 39 per cent. Lazard's chief executive, Kenneth Jacobs, had a more upbeat view on the market, stating, "I expect if things clear in the US you could see a surge of activity.”
He conceded that the recent wrangling in Congress over the US debt ceiling and the ongoing concerns in the Eurozone over national debt in countries like Greece, Portugal and Spain, are all holding back M&A activity at the moment. However, Jacobs was clear in his projections that news of recovery and solutions in these regions could not only help to boost deal-making, but could lead to a “surge of activity”.
There is little doubt that the announcement of an agreement to increase the US debt ceiling by a further two trillion dollars is good news for M&A. However, the agreement also involved huge deficit cuts that could have a knock-on effect for the economy as a whole and little can be known at this stage about where these effects will be mostly felt.
Despite agreements in late July to bail out Greece, the Eurozone countries are still facing major debt crises, with Italy now joining the fold of economies on the verge of collapse. As a result of this, and the ongoing anxiety in the US, the worst stock market falls since the banking crisis of 2008 are being seen. On August 5 2011, the Dow Jones Industrial Index closed more than 500 points down – reported to be the worst single-day losses in three years.
Suffice to say, the US and Europe are by no means out of the woods yet and dealmakers will remain cautious as a result. Cross-border emerging market activity will, in the meantime, come out as the winner in this situation as firms look further afield for growth prospects in less risky economies.