Europe drags global takeovers to six-year slump

Global merger and acquisition activity in 2010 is off to its worst start in six years, and with economic uncertainty and a sovereign debt crisis in Europe, the second half could be just as disappointing.

As of June 22, global M&A this year was worth just under $976 billion, according to Thomson Reuters data, less than half the value of the first half of 2007, M&A's peak year, and only moderately higher than the first half of 2004, when M&A was recovering from the dot-com implosion.

While the economic crisis has depressed activity around the world, Europe's performance was bleakest, with added fears about sovereign debt and a longer recession dragging the region to its worst start in a decade and overshadowing tentative signs of recovery in the United States and Asia-Pacific. 

"Weighing on the markets have been issues like the European sovereign debt crisis. The BP catastrophe has (also) impacted world markets and will continue to represent an overhang," said Jeffrey Kaplan, global head of M&A at Bank of America Merrill Lynch.

Volatility and uncertainty have meant that Europe hasn't been particularly conducive to M&A, said Guiseppe Monarchi, head of M&A for Europe, the Middle East and Africa at Credit Suisse.

"It's difficult from where we stand today to predict anything more than that we keep going sideways in M&A for the rest of the year," he said.

First-half European M&A slumped 23 percent year-on-year to $227 billion.

The failure of British insurer Prudential's $35 billion bid for American International Group Inc's Asian insurance unit particularly depressed the region's total.

The deal, an audacious transaction reminiscent of a bull market, was scuttled when shareholders balked at the price Prudential's relatively new management was preparing to pay.

The picture was not quite so dismal in the United States, where first-half M&A fell just 5% to $339 billion and accounted for six of the year's top 10 deals.

"Comparative statistics for the first half are distorted because of the significant government-related M&A last year. If you pro forma the data, the statistics are more compelling," said Lee LeBrun, co-head of Americas M&A at UBS.

The value of deals worldwide in 2009, for example, was inflated by the UK government's investments in Lloyd's Banking Group and Royal Bank of Scotland.

In an ominous sign for the second half, deals slowed in mid-May through June as companies were reluctant to pull the trigger in the face of macro-economic uncertainty, said Gary Posternack, head of M&A for the Americas at Barclays Capital. 

"However, most of the transactions which have been put on hold have not been shelved entirely and could very well return," he said. 

M&A in Asia-Pacific was down 1.1% to just under $186 billion, with the United States and Britain dominating large cross-border business as the most acquisitive nations. 

Companies that have spent the last two years conserving cash will be in the best position to lead a recovery in M&A, although how soon that will happen remains unclear. 

"There are two trends ahead. Our clients are thinking, can we go outside our core markets to find higher growth, or can we find bargains -- undervalued assets in mature markets," said Hernan Cristerna, head of M&A for Europe, the Middle East and Africa at JPMorgan Chase & Co, which tops the advisory ranking for Europe this year. 

Deals in the telecoms, media and technology sectors have exemplified the former trend.

Spain's Telefonica, hit by stagnating sales at home, is offering a hefty premium to buy out its partner Portugal Telecom and take full control of Vivo, their lucrative joint venture in Brazil.

French giant Vivendi approached Kuwait's Zain to buy Zain's African telecom business but was eventually outbid by Bharti Airtel. Consolidation in the emerging markets has added another layer of competition for western companies seeking strategic assets. 

US food conglomerate Kraft raised expectations about opportunistic bids with its purchase of Cadbury, especially acquisitions of European companies by US peers, helped by the strength of the dollar against the euro and sterling.

News Corp's $12 billion proposal to take full control of British satellite broadcaster BSKyB is a sign that more opportunistic pursuits may be in the pipeline.

"The market is certainly better than last year, with more $1 billion-plus deals, and we expect M&A will continue to accelerate," said JPMorgan's Cristerna.