DEALS-Activism, economy weighed on M&A in 2013, issues could linger

Michael Erman and Soyoung Kim
Thursday, 19 Dec 2013 | 7:00 PM ET

NEW YORK, Dec 19 (Reuters) - Shareholder activism, economic uncertainty and regulatory interventions were a drag on mergers and acquisitions in 2013, and dealmakers cautioned that these factors could keep growth relatively slow next year.

Global M&A volume fell 2 percent from last year to the lowest level since 2009, as corporate executives were careful only to bring deals forward that they felt shareholders would reward.

"Shareholder activism and the prospect that shareholders can exercise authority over a company's strategies, especially their capital and portfolio strategies, acts as a real restraint on corporate freedom of activity," said Gene Sykes, co-head of global mergers and acquisitions at Goldman Sachs.

"Any CEO is going to be much more cautious or deliberate about doing something that looks venturesome or aggressive. I think that does make people more cautious," he said.

Regulators stalled big deals, and required concessions from American Airlines in its merger with U.S. Airways, and AB Inbev in its more than $20 billion deal for Modelo. Uncertainty about when the U.S. Federal Reserve would start scaling down its massive bond-buying stimulus has also restrained dealmaking, investment bankers said.

Still, the Fed's decision on Wednesday to modestly trim the pace of its monthly asset purchases could eventually stimulate more deals.

"Once tapering begins, we return to a more normalized economic environment and the market has had a chance to adjust, my sense is that will be a long term positive for M&A," said Bob Eatroff, co-head of M&A for the Americas at Morgan Stanley.

"Tapering should begin to eliminate one of important elements of uncertainty - uncertainty about the legitimacy of the underlying asset values of acquisition candidates."

Through Dec. 18, global deal volume fell 2.4 percent to $2.31 trillion this year, from $2.37 trillion a year earlier, according to Thomson Reuters data.

The total number of deals has fallen 8.2 percent to 34,776, the fewest since 2005.

Dealmakers expect the pace to pick up next year, based on the current backlog. Goldman's Sykes said it would be reasonable to expect M&A to be up 10 to 15 percent in 2014.

"There is more openness to transformational deals; there is recognition that we've been going through five years of waiting for the great economic recovery, which hasn't transpired, so maybe this is the new normal," said Mark Shafir, co-head of global M&A at Citigroup.


Goldman Sachs Group Inc was the top M&A adviser worldwide, with $616.7 billion worth of deals this year. JPMorgan Chase & Co, Morgan Stanley, Bank of America Merrill Lynch, and Barclays rounded out the top five.

Telecommunications activity more than doubled on the strength of 2013's largest deal, Verizon Communications Inc's $130 billion deal to buy Vodafone Group out of its U.S. wireless business. That was the third largest corporate deal ever announced.

"Individual transactions are frequently catalysts for other consolidation and having seen large deals in the telecoms space, and knowing some consolidation could occur in the cable space, that increases the likelihood that other transformational transactions happen," said Paul Parker, global head of M&A at Barclays. "People believe there is a benefit to being earlier in the regulatory queue and earlier in the consolidation process than late."

Charter Communications Inc is preparing to make a bid for Time Warner Cable Inc, which is also being eyed by Comcast Corp and Cox Communications, people familiar with the matter have said.

Media and technology also had a strong year, up 17.6 percent and 12.2 percent from last year, respectively.

Deal volume in the Americas rose more than 4 percent, as a 14 percent U.S. increase outweighed weakness in Canada, Brazil and Mexico.

European M&A volumes fell 23 percent, but dealmakers noted strength in Germany - where volume jumped 45 percent - as a positive sign for the region in 2014.

"I expect to see Western Europe recover," said Richard Hall, head of Cravath, Swaine & Moore's mergers and acquisitions practice for Europe, the Middle East and Asia.

"It makes sense that of the Western European nations, Germany would lead them out. ... There is an increasing comfort level with M&A involving in Western European companies if the primary focus of those companies is not domestic growth."

Deal volume in the Asia-Pacific region rose 10 percent.

One bright spot in 2013 was private equity, which accounted for about $358.4 billion of deals in 2013, up 24.4 percent from last year.

Investment bankers and private equity executives said the corporate activism that hurt M&A elsewhere actually created opportunities for buyout shops to pick up underperforming businesses that might otherwise have not hit the market.

"We wouldn't have bought Gardner Denver had not an activist shown up," KKR co-CEO George Roberts said at a Goldman Sachs financial services conference earlier this month. "They are a nicer form of what in the old days the green mailers and the hostile raiders used to do. They were great for our business."

Activist investor ValueAct urged Gardener Denver to pursue a sale since acquiring a roughly 5 percent in the summer of 2012. The industrial machinery maker agreed to sell itself to private equity firm KKR & Co LP for $3.74 billion in March.


For each of the past three years, there have been more activist campaigns than in any year since 2000. M&A volumes fell as corporate decision makers avoided doing deals that could be second guessed, dealmakers said.

"Nobody gets a free pass on deals that are not well thought out or unsuccessful," said Mario Ponce, a M&A attorney at Simpson Thacher & Bartlett.

"That's something that activists obviously bring to the attention of other shareholders in the market. So companies not only have to clear the initial market reaction to deals after they get it through their boards, but there is going to be second guessing now in the marketplace with the benefit of hindsight."

In the United States, activists challenged Michael Dell's $25 billion offer to take Dell Inc private, as well as the $4.7 billion bid for Smithfield Foods Inc by China's Shuanghui International.

"There has been a practice among activists that is frequently described as 'bumpitrage,"' said Morgan Stanley's Eatroff.

"After companies announce an intensely negotiated transaction, activists pour into one of the stocks and threaten to vote against the deal unless their demands to amend the terms of the transaction are met," he said. "If you consider the enormous complexity required to announce any M&A transaction, the risk that activists will seek a second bite of the apple post-announcement can be an important consideration."

Dealmakers do not expect activism to subside in 2014, and Cravath's Hall believes the current wave will last for another year or two.

Instead of making deals, many companies used excess cash to buy back their own stock. This was the biggest year for U.S. corporate share repurchases since 2007, with nearly 500 U.S. companies doing buybacks, including industry leaders like Microsoft Corp, General Electric Co and Wal-Mart Stores Inc.

"Investing and adding capacity can be dangerous in times of relative economic uncertainty because you don't really know if there is enough demand to absorb this extra capacity," said Hernan Cristerna, co-head of global M&A for JPMorgan.

"But if you keep returning cash to shareholders, you then take the risk of compromising the future. The beauty of M&A is that it is a third way that allows to create value and grow without adding capacity."