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M&A Won’t Come Back Until Valuations Down: Morgan Stanley

The market for mergers and acquisitions, which came to a standstill in the second half of 2011, won’t pick up again unless valuations come down or confidence returns, Scott Matlock, chairman of International M&A at Morgan Stanley, told CNBC.

After starting the year well, the market for M&A tailed off in the second half of 2011 amid concerns about the global impact of the euro zone debt crisis.

“Private equity companies weren’t in the game and shareholders weren’t willing to support deals,” Matlock said.

“Buyers need stability in the market and the economic outlook has to be there, but values have to come back too. Sellers haven’t capitulated.”

“The funding will come when stability comes – it’s a function of stability,” he added.

There is some optimism that the market will pick up if private equity companies, many of whom are sitting on funds raised before the crisis, may start buying again.

“Public equity investors don’t like selling to private equity unless they have a large premium,” Matlock warned.

“We expect private equity firms to take their time getting back in. They are going to want to see Europe more fixed before they do.”

Plenty of corporates are also sitting on more cash than before the crisis began, as they have paid down debt and bolstered their balance sheets.

“There’s a lot of pent-up demand amongst corporates to acquire assets, but that won’t happen without confidence,” Matlock said.

“People don’t want to put their foot forward on valuation because they think things could get cheaper or they simply don’t want to look stupid because of the general economy.

Cross-border M&A, one of the most notable trends of 2011 as swings in the currency markets gave companies in Japan, for example, more purchasing power, will come back strongly when the market picks up again, he believes.

“We are going to see more and more cross-border activity,” he said.

“Japanese, Chinese and Indian buyers are more confident buying assets in the US and Europe now.”

Utility companies, energy companies and “hard assets” will be in demand when the market picks up, while the tech sector will lag behind the rest of the market, according to Matlock.

He identified airlines and telecoms as the sectors most in need of consolidation.

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