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Stock Strategist

M&A Market Awaits Clearer Economic Signals

The means and motives for deals are in place, but macroeconomic fears will likely keep the M&A market in waiting.

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Global merger and acquisition activity continued to decline through the latter months of 2012, bringing total deals announced down 3.1% for the year. However, a number of sizable transactions were announced in the fourth quarter, particularly in December, more than offsetting the plummeting deal sizes for the first nine months of the year and bringing total dollar value 0.6% higher in 2012. Might this be a sign of further megadeals around the corner? We are skeptical. Some resolution of fiscal policy matters in the United States should help, but we expect to see greater signs of global economic strength before the M&A market heats up again.

The means to do a deal are widely prevalent. We believe banks have an increased appetite for funding leveraged buyouts, and the corporate bond market is open and active, making it easier to finance large-scale acquisitions, particularly as companies continue to stockpile cash. Higher market valuations have supported equity raises as well, so there is little question that capital is available for M&A, but CEOs continue to delay pulling the trigger. The S&P 500 is only some 5% off its 2007 peak, yet total deal value is down nearly 50% from five years ago. So while the number of deals completed looks more encouraging (down about 8% compared to 2007) the M&A market is still sluggish relative to the size of the market and how stocks have performed. We believe this could create more acquisition activity in sectors with cheap valuations, such as energy and financial services, given the wider margin of safety to create shareholder value.

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R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.