September 30, 2010, 12:41 pm — Updated: 1:16 pm -->
Deal Makers Cautious Despite Uptick in M.&A.
A pickup in mergers and acquisitions over the last two months has the bulls on Wall Street thinking that the deal market is back in full force. But many senior deal makers remain cautious about the increase in M.&A. activity, given the continued uncertainty in the direction of the economy.
“Basically, M.&A. is a function of a market economy, and there are so many factors that come into play that there is no way to predict what will happen in the future,” Martin Lipton, one of the founding partners of the law firm Wachtell Lipton Rosen & Katz told DealBook at the Bloomberg Dealmakers Summit on Thursday in New York. “Yes, there has been a significant increase in activity lately — sometimes that portends an increase in deals, sometimes it doesn’t.”
M.&A. activity did pump up in August, which is normally one of the slowest months for deals of the year. That enthusiasm carried over into September with a number a major transactions announced, including Southwest Airlines’ announcement on Monday that it would acquire AirTran, a rival budget airline, for nearly $1.4 billion. Global M.&A. volume totaled nearly $730 billion in the the third quarter, up 43 percent from a year earlier, according to data from Dealogic.
But this past performance is not impressing deal makers. While they are seeing more deals in the pipeline these days, they are only seeing the strongest and largest companies emerge with completed transactions.
“The system is in a state of slow recovery,” Roger C. Altman, the founder and chairman of Evercore Partners, said at the conference. “Parts of it are functioning very well in relation to where it was and other parts of it, like middle-market lending, are functioning very poorly and are a very, very long way from recovery.
“If you look at the amount of commercial investment loans outstanding, they have been relentlessly declining for almost two years, and you know you cannot have a true healthy economic recovery with bank credit lending like that.”
But Timothy Ingrassia, the head of mergers and acquisitions for Goldman Sachs in the Americas, believes that while financing may still be an obstacle in doing some deals, the main obstacle he sees has shifted from debt to the equity side of the transaction.
“If you think about a $10 billion deal that requires $4 billion of equity, you are talking about multiple private equity firms that have to get together,” Mr. Ingrassia said at the conference. “Right now, that dynamic, creating consortia and having buyers back in unity to get something done, may be the most difficult piece of the deal, while six months ago I would absolutely say that financing was the most difficult part of the deal.”
Despite the difficulties in arranging club deals, Blair Effron, a partner at Centerview Partners, believes strongly that private equity will probably be the biggest part of the deal market in the next year. Many private equity firms will need to exit their investments and so that could mean a large uptick in deal activity there.
Regulatory changes that would increase the amount of taxes that private equity firms would have to pay to exit certain deals is likely to determine whether some new deals get done. But there seems to be only modest concern from deal makers, or their clients, about the impact that the sweeping new financial regulatory law will on their business.
“I find that general legislation like Sarbanes-Oxely and Dodd-Frank does not that much of an impact,” Mr. Lipton told DealBook. “Dodd-Frank has more of an impact on financial transactions, but if there is an opportune transaction, Dodd-Frank will not interfere with them going forward.”
– Cyrus Sanati
Copyright 2010 The New York Times Company