Six predictions for deal activity in 2012

In what was perceived as an environment conducive to deal making, M&A experts expected 2011to lead a resurgence in U.S. deal activity. Factors such as a stabilization in the equity markets, stronger balance sheets from potential acquirers, and a return of private equity participants provided optimism not seen since the boom years. The first half of the year got off to a healthy start, but the European debt crisis and concerns about another market crash in the second half of 2011 brought the deal momentum to a halt.

Now that 2012 is upon us, the stock and credit markets appear steadier, providing for a return of hope for deal makers that 2012 will see the rebound that was intended for 2011. With cheap financing available for prospective buyers and large cash balances on the balance sheets of corporations, companies may decide to return to the marketplace to make acquisitions, strategic buyers may look to provide growth opportunities, and private equity firms may look for additional opportunities to provide a return for their investors. Still, for the market to provide the bang investors have been eagerly awaiting, Europe’s debtors will have to show they have improved.

So what can we expect from deal activity in the new year?

1. The European debt crisis will spur M&A and U.S. cross-border activity.
   Activity between European companies has slowed since concerns about debt resurfaced across the EU. This, however, has provided an opportunity for overseas firms to plunge into the European marketplace by taking advantage of attractive valuations. This is evident through the purchases made by U.S. firms in the second and third quarters of 2011, when companies reached 313 and 304 deals respectively, the largest totals since 2000. Spending also surged as aggregate values exceeded $150 billion during the second quarter, the largest figure spent through any quarter by U.S.-based firms of European companies.
   
   
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2. Health Services, Insurance, and Energy will be among top industries.
   For industry activity, among those that have shown an increase from 2010 to 2011 are Miscellaneous Services, Health Services, Insurance¸ Leisure & Entertainment, Energy Services, and Retail. Many within the deal industry expect an array of transactions within these industries to continue into 2012, fueled by strategic buyers’ thirst to reenter the market. Notable transactions within these industries included the purchase by Express Scripts Inc of Medco Health Solutions Inc for $27.5 billion, Alleghany Corp’s purchase of Transatlantic Holdings Inc for $3.7 billion, Cigna Corp’s acquisition of HealthSpring Inc for $3.7 billion, Marathon Oil Corp’s acquisition of Hilcorp Resources LLC for $3.5 billion, and Superior Energy Services Inc’s acquisition of Complete Production Services Inc for $2.6 billion.
    
3. Private Equity buyers will be the key to a revival of the M&A marketplace.
   Looking at pricing multiples, the recent slowdown for M&A activity proved buyers were more diligent in their deal making. Fourth quarter EBITDA multiples dipped to 14.8x for U.S. transactions, down from third quarter figures of 27.6x. On a year-over-year basis, 2011 figures increased to 18.4x, up from 15.1x in 2010. 2012 figures will expose whether buyers will remain diligent in their deal making, proving that value exists in the marketplace.
    
4. Mega deals will make a comeback.
   Although firms resurfaced in activity, volume still trailed activity from the boom years of 2005-2007. More notable was the absence of “mega deals,” with the largest private equity transaction featuring the acquisition of Centro Properties Group by Blackstone Group LP for $9.4 billion. Perhaps more indicative of the private equity buyers’ hesitation in the mega deal forum was the failed rumored transactions of the purchase of Sara Lee Corp for $11.5 billion by a consortium of private equity buyers and the cancellation of the acquisition of Family Dollar Stores by Trian Fund Management for $6.9 billion. The failure of such deals shows that private equity buyers are proceeding with caution, choosing to make strategic bolt-on acquisitions for existing portfolio companies rather than taking on the risk of highly leveraged buyouts. In all, private equity activity increased to 1,718 transactions and $247.1 billion in 2011, up from the 1,602 transactions and $199.3 billion in 2010. Offering a sign of hope, 2011 figures mirrored those from 2005, the start of the private equity boom, which came in at 1,778 transactions and $249.9 billion in value.
    
5. The middle market will continue to increase in activity.
   Among the middle market, which is indicative of the bulk of M&A transactions, volume and value figures also increased to 9,394 transactions and $223.9 billion in value, up from the previous year’s figures 0f 9,231 transactions and $209.4 billion in value. The middle market’s recent lows came in 2009 when activity dipped to 7,252 transactions and $132.9 billion in value. For financial advisory firms among the middle market, Houlihan Lokey led the way with 78 transactions, followed by Bank of America Merrill Lynch with 76 transactions, Jefferies Group with 69 transactions, Goldman Sachs & Co with 68 transactions, and JPMorgan Chase & Co with 66 transactions. For legal advisors, Jones Day led with 193 transactions, followed by Kirkland & Ellis LLP with 169 transactions, Wilson Sonsini Goodrich & Rosati with 115 transactions, Latham & Watkins with 106 transactions, and Skadden Arps Meagher & Flom LLP with 94 transactions.
    
6. The presidential election will trigger trepidation in the U.S. markets.
   During election years, a popular topic among voters is the economy. In the current marketplace, with uncertainty over the economy and the outcome of any presidential election, investors may take a wait and see approach. Trickle down effects could also see regulators play a more stringent role , noting that strategic acquisitions may become more difficult to strike. Regulators have already forced the cancellation of the high profile acquisitions of T-Mobile by AT&T Corp and of NYSE Euronext by the Intercontinental Exchange and NASDAQ OMX Group.

Although 2011 didn’t finish as strongly as the year had started, the optimism now shifts into the new year, with debt concerns further behind us. Keys to the year remain the continued resurgence in the private equity markets, affordable financing tied with attractive pricing multiples, and the health of the overall financial markets. Any sustained upsurge in any of the aforementioned will bring forth a rise in confidence and ultimately a continued rise in M&A activity.

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