Ipreo as a Source
Dealmakers Are Uneasy About Next Six Months; Despite a bounce in fee income, experts say economic conditions and other issues could make it tough for some M&A to get done
Lingering uncertainties about the global economy and Europe's debt problems have market participants worried that the difficult conditions in the M&A advisory market may carry into the third quarter and even into next year.
Bankers say troubling U.S. employment numbers, Europe's debt issues, the oil spill in the Gulf of Mexico and a slower-than-expected global economic recovery have roiled M&A and equity markets. That may explain the decline in first-half equity and debt underwriting fees from a year earlier.
There were, however, some signs of improvement. For example, Wall Street's first-half fee income from merger and acquisition advisory work rose from a year earlier, and so did both U.S. and global deal activity. This shows that companies with long track records have been able to finance acquisitions with cash on hand or equity issuance.
But many investors, who will be watching the earnings announcements scheduled to start next week, have been skittish about putting their money to work in an unsteady market. Money managers at pension and mutual funds have been delaying their purchases of bond and stock issues.
"M&A activity in the second quarter started out fairly strong then tapered in May and June, due largely to macroeconomic concerns and an increasing reluctance on the part of acquirers to pull the trigger on significant transactions," said Gary Posternack, head of M&A for the Americas at Barclays Capital Markets. "As we look to the second half of the year, we believe activity will continue to be somewhat subdued in the near term as a result of continuing macro issues. However, we are optimistic that as the year progresses, some of the underlying desire for strategic transactions will return to the fore, and we'll begin to see a pickup in activity."
Second-quarter global debt capital markets activity fell 40% from the first quarter, according to Thomson Reuters. In the first half, such activity dropped 23% from a year earlier, to $2.6 trillion, while fees from debt underwriting fell 8.3%, to $8.8 billion.
Thomson Reuters also reported that first-half equity capital markets activity fell 7% from a year earlier, to $314 billion. Wall Street fees from equity capital markets declined 5.7%, to $8.9 billion.
On the M&A side, second-quarter activity rose 5.4% from the first quarter, to $546.5 billion. Advisory firms generated $16.5 billion of fees in the past quarter, when energy and power, telecommunications, financials, consumers and materials were the top sectors for deals.
Bankers say valuation volatility and challenging financing markets that hindered access to capital damped second-quarter enthusiasm for deals and delayed some large transactions.
As of July 1, the backlog of IPO filings stood at 113 companies seeking to raise more than $26.8 billion, according to Ipreo Capital Markets Analytics.
"CEOs and boards are going to be more cautious in changing markets. I feel that's more the temperature of the market. It's cooled around volatility and instability. I think that will characterize more of the third quarter, as well," said Jeff Kaplan, global head of M&A at Bank of AmericaMerrill Lynch.
"There's been a good pipeline of deals developed, but some of those deals might not get executed if the markets are unsuited. So, the hope is that we continue to manage through what is maybe fewer deals near term until there's more market stability and credit support and maybe an uptick or a resurgence toward the end of the year into the fourth quarter in both strategic and private equity."
Kaplan's firm was the top underwriter in global debt, equity and equity-related paper for the first half, followed by JPMorgan Chase, Barclays Capital, Deutsche Bank and Citigroup, according to Thomson Reuters. B of A Merrill also led the way in the second quarter.
Market participants say there was optimism in the equity markets about economic recovery early in the second quarter, but as the quarter progressed, concerns over Europe, China's pullback and tightening and signs that markets might have gotten ahead of themselves combined to contribute to keep volatility high. The VIX index has risen and stock prices have seesawed.
Initial public offerings became tougher to complete, as investors were hesitant to buy unseasoned companies and stuck to stable, well-known names. Participants say most IPOs did not price within their target range (even after a range reduction in some cases) and did not perform as well in the aftermarket as expected.
But, there were some IPOs that did well once they were in the open market. For example, shares of the California automaker Tesla Motors were sold above a target range and climbed more than 30% on their first day of trading; they did, however, slide back toward the issue price of $17 by the end of the week. And shares of the Chinese digital navigation firm AutoNaviHoldings priced at the high end of their range and rose 8% on their first day of trading.
Nevertheless, bankers remain skeptical about the prospects for a full-scale IPO revival.
"There will likely be pockets of strength in certain sectors with deals getting done. We don't expect a complete shutdown like we experienced in '08. There will be IPOs, with a number of big ones ready to come," said Frank Maturo, co-head of Americas equity capital markets at B of A Merrill. "The question is valuation. Will the sponsors or owners of the companies accept the valuations that might not fully reflect the returns they expected to garner on their investments?"
In debt capital markets, second-quarter high-yield activity fell 28.8% from its record high in the first quarter. First-half fees decreased 8% from a year earlier, to an estimated $8.8 billion, according to Thomson Reuters. That includes $3.6 billion of investment grade debt underwriting fees and $2.4 billion of high-yield underwriting fees.
