Global Mergers and Acquisitions Sputter. (International Section)
Hansen, Fay, Business Credit
Mergers and acquisitions in the United States and Europe continued their downward spiral in the first quarter of this year, although once again Europe showed greater resilience and higher levels of M&A activity than the U.S. For the first quarter of 2003, 1,484 mergers and acquisitions, with a value of $66.3 billion, were announced in the U.S., down from 1,950 deals, valued at $85.1 billion, for the comparable period in 2002, according to Mergerstat. In Europe, first quarter deals for 2003 totaled 1,554, valued at $181.6 billion, compared with 2,174 deals worth $ 124.3 billion for the first quarter of 2002.
Although mergers and acquisitions worldwide broke all records in 2000, the downward trend was apparent by the middle of the year. In 2001, the number of U.S. mergers and acquisitions dropped 16.4 percent, the largest year-over-year drop in volume since 1987, according to Mergerstat. Cross-border transactions slowed in 2001, especially among European buyers of U.S. companies. In 2002, U.S. deals dropped another 13.6 percent from 2001 levels. European deals, which had outpaced U.S. transactions in 2001, dropped 13.2 percent in 2002.
Throughout 2002 and into 2003, buyers searched for ways to fund M&A deals but came up short given the sharp, ongoing declines in the stock markets and the tight credit environment. Cash became the preferred payment method beginning in 2001, accounting for 45.7 percent of all 2001 transactions where deal value was disclosed. Cash remained the dominant form again in 2002. Also, according to Thomson Financial data, divestitures have assumed a new prominence in U.S. M&A deals, accounting for 40 percent of the dollar value of all deal activity in 2002, doubling the divestiture share for earlier years.
Keith Stock, vice president of Cap Gemini Ernst &Young Financial Services, sees three major trends in global M&A:
1. The robust mergers and acquisitions activity seen across many sectors during the 1990s is unlikely to be matched in this decade. "Several sectors are reaching the point where further merger economies will be difficult to demonstrate," Stock says. "Investors, not just in the U.S., but also in Europe, have been put off by combinations that have not lived up to sometimes extravagant projections And corporate scandals, many involving concerns that mushroomed through M&As, have made corporate lenders and their regulators skittish."
2. Stock-for-stock transactions are likely to remain in the minority of deals for some time. "As financial markets swing wildly and P/E multiples shade downward, sellers are reluctant to take another company's shares," Stock reports. "And new accounting rules that call for the annual adjustment of goodwill are hurting the book value of many companies, making their stocks less attractive as remuneration and hampering valuation."
3. Big international deals should be scarce for the foreseeable future. Transatlantic deals proliferated in the past decade, allowing European and Asian companies to increase their sources of dollar-based revenue and to reap gains in that currency. "Now that momentum has shifted toward the euro and yen, dollar-based sources of revenue can be a drag on earnings," Stock notes. "As a result, fewer European and Japanese companies than before are seeking to increase exposure to the U.S. market.
And few U.S. companies are in a position to pay today's currency exchange premium for increased positions in tepid European markets."
Stock notes that the recent spate of corporate scandals has retarded global M&A activity. "Few overseas companies arc prepared to meet the requirements imposed by the U.S. government's Sarbanes-Oxicy laws," he says. "And the recent rise of international accounting standards has caused many to rethink their global expansion strategies, as evidenced by the recent dearth of new ADR listings of foreign companies in U. …