Even with the current bull market, mergers and acquisitions (M&A) have remained weak. According to a piece in Fortune, global deal volume is off by 16% this year. In fact, the dealmaking in the U.S. is down by a staggering 60% so far in 2012.
Why the fall-off? M&A is highly sensitive to macro trends. So, in light of the European debt crisis, Middle East tensions and political gridlock in the U.S., it’s no surprise that far fewer deals are getting done.
But this could be temporary. If anything, the U.S. may be poised for an M&A boom. That would definitely be a nice boost for financials like Lazard (NYSE:LAZ), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), KKR (NYSE:KKR) and Blackstone Group (NYSE:BX), which are among the big investment banks with major M&A businesses.
So here’s a look at some key factors that influence the volume and pace of deals:
Financing: With interest rates at rock-bottom levels, the cost of capital is definitely attractive. It’s possible to pay just a few percentage points on debt. The result is that with interest rates this low, it doesn’t require large returns to make money on a transaction.
But isn’t debt difficult to raise anyway? This is true but financing should loosen up. A key reason is the strength in the economy, which will make it easier for banks to justify making loans.
Besides, Corporate America has roughly $1.4 trillion in cash, and it’s earning a yield of about 1%. In other words, companies have lots of motivation to put the money to work.
Industry changes: Some huge trends in technology, such as cloud computing, mobile and social networking, are reshaping that industry’s landscape. To remain competitive, companies will have little choice but to strike acquisitions. Consider that over the past few months Oracle (NASDAQ:ORCL) and SAP (NYSE:SAP) alone have spent billions on buying cloud-computing companies.
What’s more, energy is also undergoing major changes, especially with the surge in shale exploration. Over the past few months, Apollo Group agreed to pay $7.15 billion for El Paso’s (NYSE:EP) oil and natural gas exploration business, and KKR paid $7.2 billion for oil producer Samson.
Confidence: This is perhaps the most important factor in M&A. Will a CEO or private equity investor make a huge bet amid concerns about the economy? No doubt, the financial crisis of 2008 has had a lingering impact.
But the continued strength in the U.S. economy will definitely bolster confidence. It’s especially encouraging that there has been fairly consistent job growth.
True, M&A tends lag behind an economic upturn — it takes a few months to get the dealmaking engine going. But once it does, the momentum can get strong.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.