Time to Catch the Deal-Making Wave: UBS

A new wave of deal making will continue despite a slowdown in merger and acquisition-related activity in June, UBS said on Wednesday, adding investors should be sanguine about the weakness in the second quarter and simply acknowledge that there will be dips in what it says are still strong figures.

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“Aside from acknowledging shorter term fragility, we see strong drivers of a continued build of the wave,” UBS Executive Director Daniel Stilit wrote in a note to clients.

According the broker’s analysis, global M&A volumes in the second quarter suggest a slowdown in most regions whilst Europe powers ahead despite a dampening in risk appetite and more volatility.

Global M&A volumes fell 16 percent in June compared with May, Stilit said. But the second quarter of 2011 was the strongest since the fourth quarter of 2007 for European M&A, his analysis showed.

UBS remains bullish, saying the market is looking cheap relative to levels when M&A was booming.

Rather than hoard their cash, CEOs are feeling increasing pressure to deploy their growing surplus capital to grow and analysis suggests that companies' share prices will react positively to deal announcements, Stilit said in his note.

Stilit, who spoke to CNBC on Wednesday, said the jury was still out on share buybacks and returns of cash.

“Structurally, companies on the whole don’t consider themselves as being in the business of making extraordinary returns of cash to shareholders. They would much rather invest for growth,” he said.

“Returns of cash make sense when you want to reduce re-investment risk, when you’ve got cash building up and institutional investors are starting to worry about acquisitions for the sake of acquisitions,” he added.

According to Stilit, markets still seem to be receptive to growth despite the dip in global M&A activity in the second quarter of 2011.

He cited shares in Melrose , which were up 3.6 percent on the day the company confirmed a preliminary approach for Charter , and Solvay, which gained 2.3 percent on the day it announced an offer for Rhodia as examples.

The vast majority of potential M&A deals are not jeopardized by a lack of financing, according to UBS.

“So far, we have seen limited impact in the bank debt or corporate and convertible debt markets,” Stilit said.