Dealmakers look past winter, 'fiscal cliff,' for thaw

Perpetually optimistic investment bankers are hoping a resolution to the U.S. "fiscal cliff" and cheap, plentiful financing will fuel a rebound in mergers and acquisitions in the spring of 2013 and set business back on the road to recovery.

The high hopes come after a tough year for dealmakers, as uncertainty about the euro zone, the U.S. presidential election and deficit gave many CEOs cold feet. Global transaction volume fell 3.7 percent this year to $2.357 trillion, according to preliminary data from Thomson Reuters. The number of announced deals fell 11 percent to 35,794, the data shows, its lowest level since 2005.

Goldman Sachs and Morgan Stanley retained their positions as the No. 1 and 2 M&A advisers globally, respectively, this year. Barclays catapulted from No. 7 to No. 3, bumping JPMorgan Chase & Co to No. 4, the data shows.

"M&A activity next year will be driven more by necessity than a wholesale renewal in CEO confidence," said Scott Matlock, chairman of international M&A at Morgan Stanley, noting that a number of logical deals were put on hold amid the financial crisis. "But the necessity to get them launched and executed has, in many cases, never been higher."

IntercontinentalExchange Inc, for example, announced a deal on Thursday to buy NYSE Euronext for $8.2 billion, a merger driven by the need for scale in the exchanges sector. Sprint Nextel Corp also just struck a deal with Softbank and Clearwire, to help the No. 3 U.S. wireless carrier better compete with larger rivals Verizon Wireless and AT&T Inc.

Deal talks have picked up over the last few months, which could lead to announcements next week and next month and closings in the spring, said Brian Friedman, chairman of Jefferies Group's executive committee.

"When I look out, particularly to the second quarter, I can feel the momentum in the flow," Friedman said on a conference call on Tuesday. "It does just feel like it's picking up. And if we get some good resolution on the U.S., the deficit issue, we probably will see very solid 2013 M&A."

President Barack Obama has been in contentious negotiations with Congress about how to deal with the nation's budget deficit in time to avoid the "fiscal cliff" of automatic spending cuts and higher taxes that could hit the economy next year.

Meanwhile, the Federal Reserve has signaled its intention to hold short-term interest rates near zero for at least 2-1/2 years, prompting investors to run to corporate debt for higher yields and driving down companies' borrowing costs to near record lows.

A top-rated industrial company, for example, can now issue 90-day commercial paper at an interest rate of 0.15 percent, which is 10 basis points above three-month Treasury bills.

Several bankers said they eventually expect such low borrowing costs and a need for growth in a tough economic environment to lure companies back into the fray.

"Buybacks and dividends are not a strategy, but CEOs have been reluctant to do huge deals," said Henrik Aslaksen, global head of M&A at Deutsche Bank. "We can expect the market to be more buoyant next year, with the flow of midsized deals continuing in the more mature markets."

To be sure, bankers do not yet expect a return to the heady days of deal making from before the financial crisis of 2008.

"In order to unblock things we need two factors: corporate confidence and a period of sustained stability," said Goldman Sachs' head of M&A for Europe and Asia, Gregg Lemkau.

He said the consensus view in Europe seems to have evolved from one of "real nervousness" about the future of the Eurozone to confidence that Europe will likely "muddle through."

"While not overly exciting, this 'muddle through' environment may just provide that period of stability that we need to drive recovery in M&A," he said.

CROSS-BORDER DEALS

Bankers said they expect more activity in the telecom sector, as recent deals set the stage for another round of consolidation, and in healthcare, as companies seek to rein in costs in the face of new healthcare laws.

In addition, cross-border deals should grow rapidly as "American companies acquire to grow in emerging markets, Chinese state-owned enterprises secure resources abroad and European and Japanese companies diversify away from slow-growing economies," said Jonathan Rouner, Nomura's head of M&A in the Americas.

The energy sector saw the most action this year, with deals worth $444.60 billion. But that was still a decline of 8 percent from last year. The consumer staples industry saw the highest increase in announced deal volumes, recording a 70 percent gain, fueled by Anheuser-Busch InBev's planned $20 billion buyout of Mexico's Grupo Modelo and the split of Kraft into Kraft Foods Group and Mondelez International.

Spin-offs and divestitures accounted for nearly 47 percent of all deals this year, the highest percent in 20 years, as many entities sought to streamline their operations. In some cases, the spins have been prompted by activist investors.

"It's a hard market in which to get complicated things done," said Peter Tague, co-head of Citigroup's global mergers and acquisitions team.

"Lately we've seen more large, cross-border deals that don't succeed than those that do get to announcement," Tague said.

Anticipated deals that stalled in late stages include a bid by Sprint for MetroPCS for some $8 billion and a deal between Diageo and Jose Cuervo that would have valued the tequila maker at roughly $3 billion.

At the same time a lot of auctions are ending in failure, such as those for Allscripts Healthcare Solutions Inc, Advance Auto Parts and Dun & Bradstreet.

Sometimes sellers set unrealistic price expectations but other times assets just didn't attract enough bidding competition, said Nomura's Rouner. He said sophisticated sellers are now becoming more willing to enter private talks with capable buyers at fair prices instead of going straight to auction.

"There is a decent pipeline. I wouldn't call it robust," said Paul Parker, head of M&A and global corporate finance at Barclays. "I don't think people have picked up their pencils enough to fill the pipeline."

(Writing by Martinne Geller in New York; Reporting by Michael Erman, Soyoung Kim, Jed Horowitz, Nadia Damouni and Richard Leong in New York and Sophie Sassard and Anjuli Davies in London; Editing by Phil Berlowitz)