Saturday, December 29, 2007

Is the M&A Boom Over?

“That’s the question McKinsey poses in Dec 27th McKinsey Quarterly.”

M&As tend to boom when interest rates are low (it’s easier to borrow money) and when companies are undervalued (they can be split up and resold at a profit). But the wave of European deals in 2006 noted by Ian Scott of Lehman Brothers “seem to be more about industry consolidation and the political desire to create national champions in sectors such as energy” - “if companies are getting together for reasons other than valuation or financial consideration, I suppose that isn’t quite such a good sign,” so whilst buyouts continued to dominate the headlines on a weekly basis back in 2006, and following James Rossiter September 2007 Times Online comment ... Restructuring has been named as the "the hottest game in town" according to ... the M&A boom is over, 2008 is shaping up to be a tough year.

Deal making in 2007: Is the M&A boom over?

* A wrap-up of 2007 M&A activity finds that the volume of mergers and acquisitions reached new heights during the year but then fell precipitously after the subprime-lending crisis made credit tighter. Nonetheless, suggestions that the M&A boom has met its demise may be premature.

* Most of the decline in M&A since August was concentrated in private-equity deals; corporate acquisitions continued apace. In a market characterized by tighter credit and a heightened appreciation of risk, this M&A boom will continue only if the more fundamental forces behind it, such as the surging activity of acquirers in emerging markets and increasing cross-border activity, continue as well.

* Furthermore, deal makers largely continued to exert greater discipline in M&A, as evidenced by metrics for the value that deals created and by the smaller number of acquirers overpaying for acquisitions.

McKinsey Exhibits:
*1: Slow-down in M&A over the last few months of 2007 concentrated largely in the private-equity sector.
*2: M&A deals continued to generate strong value in 2007.
*3: The acquirers’ share of the overall value created by deals has improved somewhat.
*4: The levels of value created by deals in different sectors and geographies continue to diverge significantly.

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