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M&A Hits Decade Low, but Goldman Sees Upside

Adam Jeffery | CNBC

The level of merger and acquisition activity (M&A) has fallen to its lowest since 2004, according to a new report, but Gregg Lemkau, co-head of global mergers and acquisitions at Goldman Sachs says confidence is returning to the M&A market and more buyouts could be on the cards.

"The confidence is building," Lemkau told CNBC Tuesday. "The mood to do big strategic deals is better now in the boardroom than it has been at any point in the last three or four years, but it's trying to get those transactions done and get them over the finish line that is a little bit more difficult."

A new report released by Dealogic on Tuesday showed that 17,180 global deals were announced in the first half of 2013, the lowest first-half amount since 2004. The value of those deals reached $1.25 trillion, slightly higher than in the first-half of 2012 but activity tailed off in the second quarter, with a total value of 589.5 billion (14 percent down on the previous quarter).

This lack of movement in the market comes at a time when global stocks have been on a tear, with the Dow Jones and the S&P 500 clocking gains of around 11 percent year-to-date and Japan's Nikkei 225 Index surging over 30 percent since the start of the year.

"It's not an insignificant amount of activity but it is not the recovery that one would expect given where markets have gone," Lemkau said.

"So you think we should be in this great M&A market, but M&A volumes has been sluggish."

A historically low cost of capital with ultra-loose monetary policy by central banks should also be stimulating M&A, Lemkau said, as well as record cash balances and relatively limited organic growth opportunities, he said.

Stock market reaction to high-profile deals when they have happened has been favorable. Shares of Kabel Deutschland received a bounce on the news that Vodafone was interested in acquiring the firm. Japan's SoftBank has also traded higher with its continued interest in U.S. wireless operator Sprint Nextel.


"Shareholders actually want to see companies investing the capital in growth," Lemkau said, adding that technology, media and telecommunications were the sectors with the most activity this year, as big players with well-performing stock and large cash balances have made moves to acquire smaller firms.

The U.S. has been the one bright spot, with M&A volumes up 27 percent over the same point last year, Lemkau said. This has been largely driven by confidence, he said, but the same can't be said for Europe, which continues to recover from its ongoing sovereign debt crisis.

"What I think is holding [M&A] back is there's still a prevailing sentiment amongst CEOs and amongst boards. There's an element of execution risk around M&A that's different than status quo and that's holding things back."

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