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By Jeremy Glaser and Bridget Freas, CFA | 01-28-2013 04:00 PM

Cautious Optimism for More M&A Activity in 2013

Growing corporate cash balances and slowing organic-growth opportunities could lead to increased deal volume this year even if economic uncertainty throttles some activity, says Morningstar’s Bridget Freas.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Will merger and acquisition activity pick up in 2013? I'm here today with Bridget Freas, a senior equity analyst at Morningstar. She recently co-authored a report on the M&A landscape this year. We are here to get her thoughts on the topic.

Bridget, thanks for joining me.

Bridget Freas: Good to be here.

Glaser: At the end of last year, we saw an acceleration in M&A deals. Is that start of a trend? Is 2013 going to be a real blockbuster year for mergers?

Freas: Well, if you look at just the end of the year, you might think that, but I think you need to take it in the context of the whole year. Deal activity was down 3% from 2011 for all deals announced. But if you look deal sizes, they really picked up in the fourth quarter, particularly in December. So the dollar volume of all deals announced last year actually increased a tiny bit, but if you take out the fourth quarter, it would've been down by a lot. So, it's really hard to make a trend out of the last fourth quarter, but we are cautiously optimistic that 2013 is going to be better than 2012.

Glaser: What are some of the factors that are pushing management teams to look at more deals?

Freas: We are expecting a pick-up particularly in strategic acquisitions. We do think that the leveraged buyout market is open. We do see opportunity for financial transactions, but I think particularly, if you look at management teams, they are sitting on stockpiles of cash. That's the number-one thing. There is only so long that executive teams can wait on pulling the trigger and actually deploying that capital. The other thing, I would say is, for a lot of sectors, corporate profit margins are at a cyclical peak. So, it's going to be hard to continue to grow the bottom line without new sources of earnings, and we think one of the easiest ways to achieve that is through acquisitions--definitely new sources of growth and just a way to continue to drive the bottom line.

Glaser: On the flip side, what's holding the deal flow back?

Freas: I think the number-one thing is just the economic environment as a whole. We are cautiously optimistic that economic indicators are starting to look better in 2013 in the United States. Europe is starting to stabilize. We're starting to see a little bit of a turnaround in China. But I think there is still a lot of uncertainty. I think that's the number-one factor, and we're seeing that probably across all sectors.

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