Buoyed by the busiest August in more than a decade, global mergers and acquisitions have risen 21% so far this year, with stable activity in the United States and growth in emerging markets offsetting a drop in European dealmaking.
A resurgence of strength in financing options and substantial war chests have given corporate buyers the ability to pursue deals that had been put on the back burner in the first half of the year. Private equity firms also have returned to the fold.
So far this year, worldwide M&A has totaled $1.678 trillion, up 21 percent from a year ago, according to preliminary data from Thomson Reuters.
In the third quarter, activity totaled $599 billion, up 35.6 percent from a year ago, marking the third consecutive quarter of growth and the strongest quarter for worldwide M&A in two years.
Goldman Sachs took the top spot in global M&A, up from second place a year earlier, and ahead of JPMorgan and Morgan Stanley.
"Late in the first quarter and in the second quarter, we experienced some very significant market volatility due to the European debt situation. Clearly, some activity which was put on hold reappeared in Q3," said Cary Kochman, head of mergers for the Americas at UBS.
The outlook for the rest of the year remains cautious, however, with modest year-over-year improvement expected but no blistering turnaround.
"We are living in a fragile environment. A steady state with no negative catalyst will actually lead to more activity," said Jimmy Elliott, JPMorgan's global head of M&A.
"Many CEOs and boards are not willing to do transforming transactions at this point, but we do have a nice, healthy resurgence of smaller, bolt-on acquisitions," Elliott said.
"That is an absolute fundamental building block that's required to get M&A back on track," Elliott said. "The difficulty we have is the inability to know whether that is going to start in November or in next March."
Still, Jeff Kaplan, global head of M&A at Bank of America Merrill Lynch, said this point in the recovery cycle could be among the best times to do a deal.
"Some of the best deals are done at the beginning of an economic recovery and that's why deals tend to be fewer and potentially higher risk. The better valuations exist at the beginning of a recovery rather than at the height of a bull market," Kaplan said.
Francis Aquila, a partner at law firm Sullivan & Cromwell, said all the pieces are in place for dealmaking: companies have plenty of cash and strategic interest in doing deals and debt is available at low costs. Meanwhile, equity valuations are relatively low, and acquisitions can help companies expand and fill revenue shortfalls as the economy continues to globalize.
What is missing is confidence that economic conditions will be better next quarter than they were last quarter, Aquila said. Once that level of confidence is reached, it will be a spark and many deals will then move forward, he said.
"While there is always a large number of strategic transactions that are on the drawing boards, many of these seem to be in the early stages of fruition. The shareholder community seems more open to deals today than they were even six months ago," said Peter Weinberg, a partner at advisory firm Perella Weinberg.
U.S. STABLE, EUROPE LAGS
The United States showed stable M&A activity in the third quarter. Deal volume in the quarter totaled $201 billion, down 1% from the second quarter, but up 41% from the year-ago quarter, according to Thomson Reuters.
Europe lagged, with quarterly volume totaling $144 billion, down 15% from the previous quarter and down 4.6% from the year-ago quarter.
The overall growth in third-quarter merger activity was driven by improvement in the financing markets after a shaky first half of the year, bankers said.
"Particularly in the investment grade segment of the credit spectrum, the acquisition finance market is wide open. Cost of funding has come down materially from the levels of early 2009 and the structure of available financing has improved as well," said Gary Posternack, head of M&A for the Americas at Barclays Capital.
"The availability of transaction financing and the cost of that financing, if anything, are positive factors for activity rather than a hindrance," Posternack said.
Blackstone's senior managing director, Garrett Moran, said on Thursday that debt markets have rebounded and that it would be possible now to do a deal with $5 billion of debt.
"(That means) there could be a $10 billion buyout, in the not too distant future, somewhere, somehow," Moran said. "That's in the realms of today's market. Opportunities to buy things are pretty good."
Private equity deals so far this year totaled $140.5 billion, more than double the volume from the same period a year ago. The largest private equity deal of the year, announced last month, was Blackstone Group's $4.76 billion purchase of Dynegy Inc.
Among corporate dealmaking, energy and power led all sectors with $349 billion of deals in the first nine months of the year, up 65 percent from the same period a year ago. Financials, materials and healthcare followed.
"Within both oil and gas and mining, activity has been unusually strong. Overarching both sectors has been the continued desire of both private entities and government-controlled entities to further expand their resource base, with a view that resource capacity will be increasingly constrained going forward," Posternack said.
HOSTILE, TOPPING BIDS
"When buyers are going hostile and jumping other bids and there's very little private equity momentum, it's clear that there are fewer sellers than buyers," Kochman said.
The largest deal of the year remains in limbo with Potash Corp Wednesday filing a lawsuit against BHP Billiton that seeks to block the mining giant's $39 billion hostile bid and intensifies the month-long takeover battle for the Canadian fertilizer company.
The boldest example of topping bids came from Hewlett-Packard Co, which won a bidding war with Dell Inc for data storage company 3PAR Inc with a $2.4 billion offer. The deal valued 3PAR at more than eight times sales, which many analysts slammed as too high for a company that has barely made a profit since it was founded in 1999.
"Globally, emerging market inbound and outbound activity will end the year at a record percentages of overall M&A activity. The big global theme is the continued emergence of developing markets. It's all driven by growth," Kochman said.
"China, Brazil, Canada and India remain of great interest. The reason for that is these markets entered the financial crisis with some of the lowest debt levels. They are also markets that are experiencing strong growth," Kochman said.
BRIC -- Brazil, Russia, India and China -- deal activity accounted for 18 percent of M&A for year-to-date 2010, a record. Overall BRIC M&A is up 65 percent from year-to-date 2009.
"We're seeing a secular trend of emerging market countries starting to produce champions that are reaching overseas. Indian companies, for example, are able to do deals that would have eluded them a few years ago," said Scott Matlock of Morgan Stanley, who as chairman of international M&A oversees the bank's mergers business outside the Americas.