MARKET volatility will help to fuel one of the biggest years ever for global and European mergers and acquisitions, according to Morgan Stanley, the investment bank.
In an internal study, the bank argues that, despite the recent spike, market volatility remains low by historical standards and some volatility may even facilitate the closing of deals by breaking the so-called “sellers strike” witnessed in the second quarter.
Gavin MacDonald, the London-based head of European M&A at Morgan Stanley, said: “The strike may now be over. Shareholders were getting into the mentality of not selling and a lot of deals being proposed were not getting past the starting gate because shareholders were demanding a high premium on already high prices.”
Mr MacDonald said that pent-up demand from the second quarter was waiting to burst out again and only a significant weakening in the credit market would prevent a rash of M&A activity during the rest of this year.
“Shareholders are now looking at the markets and feeling a bit more inclined to take that premium on offer because they don’t know where prices are headed,” Mr MacDonald said.
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Unlike the last M&A boom in 2000, the current M&A cycle is broad-based, with activity across all sectors. The boom has been driven by a wall of money from private equity, hedge funds and corporates.
Even though many companies are taking on vast amounts of debt to fund the deals, the banks increasingly are able to syndicate their positions. “It used to be the case that one or two of the banks were stuck with a big hung bridge of £1 billion sitting on their balance sheets, but the evolution of the market means banks are now able to offset their positions in a more efficient way,” Mr MacDonald said.
Even a slight or gradual interest-rate hike is unlikely to dent M&A activity, according to Morgan Stanley. Based on activity levels experienced in the first half of this year, global M&A activity is on track to hit as much as $3,428 billion (£1,850 billion) in 2006, it says, trumping the $3,173 billion in 2000. The biggest deals include the $89.4 billion merger of AT&T and Bell South and the $56.7 billion merger between E.ON and Endesa.
In European markets, M&A activity in Britain in the year to May 30, 2006, has soared to $475 billion, compared with $345 billion the same period the year before. In Spain, it has surged to $279 billion in the same period, against $71 billion the year before.
Financial sponsors, including banks and private equity groups, are likely to see any continued re-rating of the equity market as a potential buying opportunity. The biggest M&A deals for financial sponsors so far in Europe are the $11.566 billion takeover of VNU and the $10.618 takeover of TDC. Mr MacDonald predicts that financial sponsors could complete a €30 billion deal or bigger if they pre-sell some of the constitutent parts of the business.