Six years after the peak of 2007, while the equity markets returned to their pre-crisis levels, the same cannot be said of the M&A market, which is still 43% below its starting point. Expressed as volume rather than value, the finding is similar: the number of transactions announced in 2013 (36,819) fell back 7% for the year as a whole, and 16% since 2007 to reach its lowest point since 2005.
These overall numbers hide a more mixed geographical and sectoral result:
- on a geographical level, in 2013, the US began to rebound (11%), against the tide, thereby limiting its downturn to 34% since 2007 versus 43% for the global market as a whole. Likewise, emerging Asia held up well in 2013 (9%) and has even enjoyed growth since 2007 (15%). Conversely, Western Europe fell a further 30% in 2013, bringing its aggregate decline to -68% since 2007;
- on a sector level, energy, real estate and telecoms were the most active sectors in 2013, accounting for 15%, 14% and 11%, respectively of the announced transactions. Yet while these first two sectors were already on the podium in 2012, it is mainly telecoms that stood out (see Verizon Wireless, Virgin Media, Portugal Telecom, E-Plus Mobilfunk) by stealing third place from financials, which slipped to fourth place with less than 10% of the total market, versus 13% in 2012 and 23% in 2008…but it should begin to recover at last in 2014.
The long-awaited recovery of global M&A is expected to materialise in 2014:
- this market is, overall, in the trough of the cycle while the global economy is gradually improving;
- the financial environment remains favourable: if we except the periphery of the eurozone and the stressed emerging markets, interest rates remain low, banks are eager to lend, and issues are being bought up quickly;
- in Europe and the US, businesses are going to regain a certain level of financial clout, as attested by the free cash flow projected by the consensus over the next two years (2014-2015);
- deals remain accretive: thus, even in the US, the world's most expensive market, the earnings yield continues to compare favourably with the yield of corporate credit rated BAA (6.5% vs. 5.4%, respectively), not to mention Europe, where the spread between the two rates remains above 4%;
- last but not least, since they are the decision-makers of last resort where M&A are concerned, business leaders' confidence is improving. The first two weeks of the year, during which nearly $120bn in transactions – more than twice last year’s in the same period – were announced, have so far confirmed our optimistic prognosis.
Generally speaking, after M&A bottom out, the equity market tends to rebound in the six months that follow. Given that, firstly, the European M&A market is one of the furthest behind, and secondly, the old world's economic growth is on the verge of rebounding, European equities, especially, should reap the benefit.
By way of comparison, for 25 years on average, whenever the M&A number hit a low point before bouncing back, European equities rose 11% over the next twelve months, 9% of which occurred over the first six.
In addition to the other strengths of European equities, such as their comparatively lower valuation,
their return to profit, or the return of flows, the topic of M&As should prove to be an additional stimulant.
