Corporate Deal Makers Cautiously Return

December 20, 2010, 10:54 am — Updated: 12:51 pm -->
By EVELYN M. RUSLI, NYT DealBook:
As the dark clouds of economic uncertainty lift, the environment for corporate deal-making is looking brighter.
With record cash on their balance sheets, United States companies are once again willing to invest in growth, according to McKinsey & Company’s quarterly report on economic conditions. The report, set to be released on Monday afternoon, found that a majority of executives are not postponing acquisitions or capital investment. And many are looking abroad, eager to capitalize on the fast-growing emerging economies and the rising influence of China, India and Brazil.
William Huyett, a director at McKinsey, said companies were cautiously optimistic, a positive sign for deal-making activity in 2011.
“First and foremost, there is confidence that the real markets are starting to grow again, unemployment is starting to drop and capital markets are starting to stabilize,” Mr. Huyett said. “Boards of directors are less skittish in pursuing transactions. We’re far from out of the woods, but the period of absolute uncertainty has passed.”
That said, McKinsey’s findings represent a more tempered view among executives compared with other recent reports. Thomson Reuters and Freeman Consulting Services recently predicted a 36 percent rise in global deal activity to $3 trillion in 2011. PricewaterhouseCoopers announced this month that “key conditions are in place for a resurgence in deal-making in 2011.”
McKinsey interviewed 2,076 executives in early December from a broad swath of industries. According to the results, 54 percent said they were not delaying or failing to pursue strategic deals, versus 25 percent who said they were holding back. And about 22 percent were undecided. The results, noted Mr. Huyett, were “remarkably consistent” across all sectors.
The availability of credit has also improved. Some 44 percent said their company had received financing in the last six months. Among those who said they were postponing deals, only 16 percent cited credit issues for their decision — an improvement from 30 percent in September.
Most executives said they were looking to the emerging markets for growth, particularly India, China and Brazil. More than 75 percent expect the three countries’ influence to grow over the next five years, while the clout of developed economies, like the United States, the European Union and Japan, will stagnate or recede. Unsurprisingly, the vast majority of companies that do play in emerging markets — some 72 percent — expect a greater share of revenue or profit from these regions in the coming years.
Mr. Huyett said he expected companies to take a more moderate approach to deal-making, especially amid the current volatility.
“It’s better to take a measured course and pursue M.&A. systematically, instead of a reflexive jump in the pool that companies may regret,” he said.