2012Merger Market Slows to a Crawl as Caution Rules
By: JESSICA HALL
Reuters Dealtalk
July 30, 2010
The merger market is crawling at its slowest pace ever, with deals taking longer to close as players at every step move with extra caution amid fluctuating stock prices. Deals not only take longer to forge, but also take more time to get approved after deal announcements, according to data from Thomson Reuters.
"In bull markets, deals tend to move faster than in bear markets and we're in a bear market," said Marshall Sonenshine, chairman of boutique investment bank Sonenshine Partners in New York. "Deals that require financing are the slowest to move. For strategics, deals move more quickly when there is competition for the assets," Sonenshine said.
The median time from announcement to deal completion has risen to 85 days in the third quarter. compared with fewer than 70 days in the second quarter and about 63 days in the first quarter, according to Thomson Reuters data. That marks the longest time to close deals in the past five years and just surpasses the previous record of 84 days in the fourth quarter of 2007, the data showed.
"Clearly, we're in a period where deals are taking longer to come together and longer on average between signing and closing," said Francis Aquila, a mergers and acquisitions attorney at Sullivan & Cromwell in New York. "Each transaction has its own set of individual drivers, but at the end of the day, buyers and sellers are being overly cautious."
Many corporations have spent the past few years cutting their capital expenses, improving their balance sheets and getting leaner to survive the economic downturn. "No one wants to then go out and proceed with a transaction, only to misstep and undo all the good work of the past two or three years," Aquila said. "People are moving with an abundance of caution. I think we're going to see that continue."
One head of investment banking at a U.S. bank said the time from the initial call with a client to closing a deal has risen to roughly 12-18 months, almost twice as long as during the peaks of 2006 and 2007.
"When you've got a deal-rich environment and there's more competition for deals and more of a sense of urgency, there's more pressure to get a deal done," said Morton Pierce, chairman of law firm Dewey & LeBoeuf's mergers and acquisitions group. "When things are slower, people are more cautious, more careful, and there's less worry about competition for assets." Pierce said.
VALUATION DEBATES SLOW DEALS
Debates about proper valuation on deals also play a role in the pace of dealmaking, bankers said. When stocks have fluctuated, sellers often cling to their highest stock price as the measure for what they're worth. "Deal pace slows down when there's a lot of question and debate around appropriate valuation," Sonenshine said.
So far this year, the average premium for deals in the U.S. has risen to 37.5 percent, up from 32.5 percent seen in the full year 2009, according to data from Thomson Reuters. Buyers and sellers always have a gap in the prices deemed appropriate for deals, which sets the stage for negotiations.
But Sonenshine said valuation debates often vary by sector. For example, he said sectors such as financial services have seen stock corrections, but mining and metals companies have been hurt by weak commodities prices so putting a price on those assets is more difficult due to stock fluctuations.
Sellers may be foolish to hope for takeover premiums that build on their best-ever stock prices and may need to adjust their expectations downward for the new market realities, bankers and lawyers said.
"Once you get more than 12 months out from an all-time high, that old valuation may not be relevant any more. The (stock market) highs a company may have achieved in 2007 are less front and center than they were before. That's less of a data point now," Aquila said.
Sonenshine Partners is a leading independent investment bank focused on providing integrated strategic, financial and corporate advisory services. The firm was founded in 2000 and is headquartered in New York City.