From DealBook.blog, June 17, 2009:
The market for mergers and acquisitions could see some real growth in the coming months after more than a year of declining deal volume, according to a new joint study published on Tuesday by Thomson Reuters and JPMorgan Chase.
The study, which examines trends in the M.& A. sector, predicts that the current down cycle in deal activity could turn around in the second half of this year, tracking the expected upward growth in the world’s gross domestic product.
Deal activity is very closely related to economic growth. When people are feeling confident and money is available, deal volumes jump. Conversely, when the economy is on the downswing and money is tight, deal activity craters.
Deal volume as a percentage of G.D.P. peaked at the top of the last two economic bubbles: the dotcom bubble in 2000 at about 11 percent and the credit bubble in 2007 at about 8 percent.
Deal activity fell to nearly 4 percent in 2008 and continued to fall in the first half of 2009.
The study found that during the downturn in deals that followed the dotcom bust, M.& A. activity contracted for approximately eight quarters before it rebounded. The credit crunch cycle has so far gone through seven quarters of contraction. As such, total activity in mergers and acquisitions could bottom out during the current quarter, the study found.
Based on their hypothesis that the pattern between M.& A. growth and G.D.P. growth will repeat itself and rebound together, Thomson Reuters and JPMorgan project that global deal activity as a percentage of G.D.P. could reach 3.6 percent in 2009, 3.7 percent in 2010 and 4.5 percent in 2011, mirroring the upturn of 2002, 2003 and 2004.
When the data is matched with the International Monetary Fund’s forecast for global G.D.P. growth in the same years, deal volume could reach $2.6 trillion by 2011.
But the argument for such a spectacular recovery is based on trends seen since 1995, when the easy money policies instituted by the Federal Reserve and other central banks fueled growth and economic bubbles. A tighter monetary policy and stronger financial regulation limiting risk could return growth in the M.& A. market to levels below 2 percent that were seen during the early part of the 1990s.
– Cyrus Sanati
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