Predicting More Pain for M&A

The worst is yet to come for the mergers and acquisitions market: That is the conclusion of a new analysis by Bernstein Research, which projects that the drop-off in M&A activity will accelerate in 2009 and won’t bottom out until 2010.
Such a prolonged decay would be a blow to the bottom lines of Morgan Stanley and Goldman Sachs, which are now more dependent on the revenues generated from deal-making because they can no longer rely on their trading arms — until recently heavily leveraged — to rake in the dough. It could also have a devastating effect on boutique investment banks, such as Greenhill and Evercore, which draw the bulk of their income from advisory work, the report said.
For most industries, the merger game is a pro-cyclical business. Strategic M&A activity has historically been correlated with favorable economic conditions. The same seems to be true of private equity deals, according to Bernstein’s analysis.
Bernstein projects that total M&A volume, including private equity and strategic deals, will decline by 25 percent in 2009 from the previous year, followed by a 15 percent year-over-year decline in 2010. This implies that the trough of the M&A market will be in the second half of 2010 and will mark a 45 percent decline from the peak 2007 levels.
That drop-off implies that peak-to-trough advisory revenues will decline by 52 percent. That is apt to hurt Goldman Sachs more than Morgan Stanley, because Goldman is more dependent on advisory revenue than its uptown rival, the report suggested.
There is a bit of a silver lining. M&A activity is still hot in some sectors where there isn’t a lot of emphasis put on leverage — like energy. Also, industries such as health care, which are not as affected by the downturn in the economy, should continue to be a source of deals, the report said.
And it could have been worse. The projected 45 percent decline this cycle is nowhere near as steep as the one that occurred in the last downturn from 2000 to 2003, after the tech bubble burst. Back then, M&A activity saw a peak-to-trough decline of 70 percent.
– Cyrus Sanati, NYT DealBook