M&A on pace for record despite signs of strain

Global M&A activity is on target for a record year after a first-half surge, bankers say, despite growing signs the benign lending environment that has underpinned the current boom may be coming to an end.
An increase in cross-border corporate mergers helped Europe push past the United States in volume for the first time in four years, and lifted the global tally of announced M&A in the first half by 51 percent to $2.8 trillion, according to preliminary data released on Friday by research firm Dealogic.
Global M&A was $1.9 trillion in the first half of 2006. "It's undoubtedly going to be the biggest M&A market ever (this year)," said Dag Skattum, J.P. Morgan Chase & Co's global co-head of M&A. But any full-year record could wind up heavily reliant on the strong first half.
In the last month, take-over-related debt has become harder to sell, fears of higher interest rates have grown, fallout from the US sub-prime mortgage woes has spread, private equity firms have come under heavier fire and some leading buyout executives say leveraged deals have peaked.
Most bankers are unfazed, however. "At least for the second half of this year, mergers and acquisitions will continue, and possibly in 2008, as well," said Jean-Francois Mazaud, global head of debt capital markets at Societe Generale. "We don't have any signals that we're very close to the end of the cycle."
Buyout firms, which have contributed to the frenzy of take-overs in recent years by making bigger and bigger deals with the help of cheap cash and eager lenders, are nevertheless starting to find the going tougher. Ahold's US Foodservice postponed the financing for its $7.1 billion buyout by Clayton, Dubilier & Rice and Kohlberg Kravis & Roberts due to weak market conditions. Meanwhile, veteran corporate raider Carl Icahn said the spate of leveraged buyouts has peaked with deal financing getting more expensive.
"The question is: are we at an inflection point?" said Gavin Macdonald, Morgan Stanley's head of European and Asian M&A. "People may have pushed leverage levels to the limit at this point in the cycle and maybe lending banks want to pull back a bit."
"Still, there is a fantastic amount of liquidity." That is important for the banks, which generated 55 percent of their fees in the first half from arranging the bonds and loans behind the buyouts. This is in stark contrast to the 28 percent contributed during the merger boom of 2000, when it was the M&A and equities fees that represented the lion's share.
Ambitious bids across Europe, including the competing offers for Dutch bank ABN Amro, are set to take M&A past last year's record in the region as CEO confidence remains high.
"We are seeing more of the European cross-border M&A than we have seen historically," said Susan Kilsby, chairman of M&A at Credit Suisse in London. The two bids for ABN Amro - worth almost $200 billion between them - exemplify the type of confidence sweeping European boardrooms which pushed the region's M&A deals to $1.2 trillion, surpassing North America's $1.1 trillion.
While private equity firms have had the spotlight turned on them lately by politicians and unions, European activity remains more corporate-driven. Leveraged buyouts represented 13 percent of European deal volume and 35 percent in the United States. Financial services, real estate and utilities were the busiest sectors globally, with $539 billion, $301 billion and $255 billion of activity respectively.
US companies were the most targeted, representing $998 billion of take-overs, while in Europe, the Netherlands, Britain and Spain tempted the most buyers. Goldman Sachs led the global M&A advisory rankings in the first half, ahead of Morgan Stanley and Citigroup. In Europe, UBS and J.P. Morgan trailed Goldman Sachs.