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M&A Q2 Importance

03/28/2012

In Q1 2012, global M&A (Figure 1.1) experienced one of its worst quarterly activity since Q3 2009, barely nudging above $400 billion in volume to date. The question for Q2 – Is the absence of deal activity a harbinger for a capital markets reversal or a potential catalyst if deal activity rebounds? Either way, I expect investors for the first time in many quarters should gauge global M&A and place it in a position of significance regarding portfolio decisions. For Q2, M&A will matter.
 
Let’s first take a look at Q1 deal activity . . .
 
•  68% of Q1 deal activity was cash transactions, good condition
•  97% of the deals were below $500 million in size, poor condition
•  U.S. companies spent $130 billion as acquirers
•  U.S. companies were the top targets with $128 billion of buyer inflows
•  Private equity spent $29 billion, a figure that is historically soft 
•  Metals, mining and minerals led deal value by industry in Q1
•  Average premium paid was 29.16%, the most favorable Q1 condition 
•  Average deal size was $128 billion 
•  Largest deal is the $45.31 billion Xstrata / Glencore deal
•  JP Morgan is the leading advisor with $106 billion on 52 deals
 
For Q2, think about the following:
 
Currently, the focus for corporate capital allocation strategies is dividends and buybacks. This has been a favorable condition for the capital markets and one that will remain consistent throughout 2012. In fact, at our March 8 Chicago conference, one of our panelists suggested corporations may pull forward special dividends and increase regular dividends ahead of the potential 2013 dividend tax rate increase. I agree with that expectation and encourage investors to incorporate it into their portfolio strategy.
 
The bullish argument for Q2 M&A begins with CEO confidence (Figure 1.2) now recovered back to the pre-deficit reduction July debacle levels. CEOs may be more comfortable in Q2 to seek deals. In addition, earnings growth is expected to contract further on the top line below 5% in Q2. Will a more confident management team now feel the need to seek growth through acquisitions? Corporate borrowing conditions remain in the sweet spot, money is cheap, and the valuations for entities are still reasonable.
 
The bearish argument centers on the need for continued improvement in Europe, U.S. labor, and GDP. Q1 U.S. GDP will fall from Q4 2011’s solid 3%, most likely in the 2.0% to 2.5% range. Federal Reserve Chairman Ben Bernanke has publically cautioned investors on the perceived improvement in the U.S. economy in recent days. Rising energy costs are approaching uncomfortable levels both in terms of price and duration on both sides of the pond. Having just prepared the April indicator calendar for Virtus, I expect Good Friday’s U.S. Labor report might be critical for a solid Q2 M&A foundation.
 
As we near Q2, whichever side your expectations fall toward, I will offer that for the first time in many quarters I will actively gauge global deal volumes. M&A in Q2 will matter, investors need to pay attention.
 
 
Figure 1.1 Global M&A, 2008-Present

Source: Bloomberg
 
Figure 1.2 CEO Confidence Index

Source: Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.