Corporate deal making has hit a dry spell, despite robust stock and bond markets that should call for a deluge. Mergers and acquisitions this year have plunged to their lowest level globally in nearly 20 years, because prices are too high and political and economic uncertainty is making potential buyers wary.
The number of deals world-wide involving publicly traded targets this year fell to 793 as of April 28, according to Dealogic, down 20% from 991 in the comparable period last year and the lowest number since 1998.
Meanwhile, companies are paying higher multiples for acquisitions and investments. Buyers paid an average of 12.8 times the target's earnings before interest, taxes, depreciation and amortization so far this year, up from 12.1 for the comparable period in 2016 and the highest year-to-date multiple since 1997. The value of deals globally, however, is up 13.9% year to date at $479.8 billion. Dealogic figures exclude spinoffs, and include minority investments.
Prospects for overhauls of U.S. corporate tax and trade policy along with concerns about Britian's plan to leave the European Union are prompting management to hit the pause button on deal activity. Rising stock prices and deal valuations are adding to their hesitation.
Executives today want more clarity on issues such as tax reform and trade policy, said Robert Profusek, global head of mergers and acquisitions at law firm Jones Day. They are taking the attitude of "don't shoot until you have to," he said.
Ongoing debates about tax reform, trade policy and corporate regulation have left companies unsure about business prospects, either their own or that of potential targets. The uncertainty encourages companies to focus only on high-priority deals, for which they are willing to pay top dollar. "This could kill or delay the marginal deals," said Brian Langenberg, principal at research firm Langenberg & Co.
Last month, medical supply maker Becton, Dickinson & Co. said it would buy C.R. Bard Inc. for $24 billion, or more than 20 times the 2016 Ebitda and 6.4 times sales, according to Dealogic.
Research firm Morningstar Inc, in an analyst note, said the price represented a 60% premium to its stand-alone valuation of C.R. Bard. Acquirers typically have paid between 4 to 4.5 times sales for medical products companies, according to Morningstar.
"We are confident that the Bard acquisition represents full and fair value for Bard's high-quality, high-growth prospects and rich margin profile," Becton Dickinson said. C.R. Bard didn't return a phone call and email seeking comment.
In the past, high stock-market levels have often coincided with robust deal activity, as they did in 1999 and 2007. But the current slowdown in deal activity comes as the S&P 500 has surged. The index is up 6.5% so far this year, according to FactSet.
Pricey markets can also make it difficult for executives to persuade their boards to approve an acquisition. "When you try to transact at high valuations it's tough," said Daniel Wolf, an M&A partner at law firm Kirkland & Ellis LLP in New York. "It's not an opportune time for a CEO to go to the board and say, 'let's do this deal.'"
The rising deal prices make executives gun-shy too. "Things are a little bit expensive out there, so we're being cautious," said Honeywell International Inc. Chief Executive Darius Adamczyk on the company's first-quarter earnings call on April 21. "That's frankly why maybe we haven't announced...any deals this year."
Mr. Adamczyk made the comments before it was reported that Third Point LLC held a stake in Honeywell and called for the conglomerate to spinoff of its aerospace business.
Industrial gas maker Praxair Inc. has also pulled back. "You saw this quarter we really didn't do any acquisitions," said finance chief Matthew White on the company's first quarter earnings call last week. "Things are getting expensive."
Last year Praxair spent $363 million on acquisitions, including five industrial gas businesses with combined 2015 sales of more than $40 million. In December, the company and rival Linde AG announced a merger of equals with a combined market value of $66.6 billion at the time.
Still, companies seem willing to fight aggressively for scarce assets.
In April, Verizon Communications Inc. topped AT&T Inc.'s $1.6 billion bid for Straight Path Communications Inc. with a $1.8 billion offer. Straight Path owns a swath of wireless spectrum thought to be at the forefront of next generation networks. The company lost money in its fiscal second quarter when it had revenues of $200,000.
Straight Path didn't return a phone call. Verizon and AT&T declined to comment.
Some big serial acquirers may feel less pressure to buy because they have been doing well even without acquisitions. "Organic growth is coming in stronger than expected," said Morningstar equity analyst Barbara Noverini, citing the examples of Honeywell, General Electric Co. and 3M Co.
Honeywell reported first quarter organic sales growth of 2%. GE and 3M reported organic sales growth of 7% and 4.6% respectively, and their earnings beat Wall Street expectations
Deal making could soon rebound depending on the fate of some of the new administration's initiatives, said Mr. Profusek of Jones Day. "If we did get a tax bill by the end of the year...there will be an avalanche of activity," he said.
Write to Richard Teitelbaum at Richard.Teitelbaum@wsj.com
(END) Dow Jones Newswires
May 01, 2017 15:34 ET (19:34 GMT)