Looking Ahead to 2010’s Deal Landscape

dealbook.blogs.nytimes.com, Monday, December 14, 2009:
Small deals will continue to dominate the mergers and acquisitions landscape in 2010, but their size and number will grow, Ernst & Young said in its annual deal outlook report on Monday.
Cash will remain a major component in acquisitions as the credit markets continue to improve, E&Y said. Meanwhile, the report predicts that private equity firms will reassert themselves as significant players both through opportunistic deals and divestitures of their own portfolio companies.
Only 145 completed deals broke the $1 billion mark in 2009, compared to 400 last year and 609 in 2007. “Mega-deals” of $5 billion or more are likely to be far and few between, E&Y said.
Still, the number of deals is expected to increase in 2010, according to the firm, which surveyed nearly 500 senior executives. Its study found that 25 percent of businesses are likely or highly likely to make an acquisition in the next six months, rising to 33 percent in the next 12 months and 41 percent within the next 24 months.
“We’re seeing signs of life emerge in the deal markets as the decade closes,” Rich Jeanneret, Americas vice chair for Ernst & Young’s transaction advisory services business, told DealBook in an interview.
The E&Y survey found that 53 percent of companies are conducting more rigorous due diligence as potential buyers adopt a more conservative approach to deal-making.
A large number of companies have record-breaking levels of cash on hand. Fortune 1000 companies have more than $1.8 trillion in cash on hand, a $271 billion increase from last year.
And private equity firms have about $400 billion in dry powder, making the leveraged buyout industry well-positioned to strike deals, the report said. E&Y forecasts that these firms will seek to refinance their portfolio companies, or build them through bolt-on acquisitions. Global divestitures may grow in the second half of 2009 as firms look to shed underperformers.
Still, financing will remain an impediment, the study found. About 62 percent of companies cited an inability to borrow enough money as a key issue preventing mergers from being completed in 2009. A loosening of credit markets should help boost deal volume somewhat next year, though the easy money of yesteryear is gone for now.
“While it is likely that deal activity may not return to pre-crisis levels within the next few years, there is some cause for optimism when looking at the three drivers of deal activity: confidence, credit and cash,” Steve Krouskos, Americas markets leader for Ernst & Young transaction advisory services said in a statement.
“Market fundamentals are strengthening, and deal activity is stabilizing,” he added. “Still, the market is full of mixed signals, which are expected to temper recovery.”
While E&Y doesn’t foresee any red-hot sectors ripe for mergers activity, some may see more action than others. The health care industry, for example, may prove popular given the stimulus money available to providers for the meaningful use of electronic health records. Integrated delivery systems, including hospital buying nursing homes and health care agencies, may also continue to grow in popularity.
In the financial sector, deals for asset managers may continue, in the wake of 2009 mergers like BlackRock’s acquisition of Barclays Global Investors.
Software and services companies will remain major targets, especially by strategic players seeking to advance their product portfolios.
– Cyrus Sanati