MARKETS SPECTATOR: Down on deals

If the bull market is tottering then it may be because it is missing one of its essential ingredients, robust merger and acquisition activity.

Not only is M&A not manic, it is barely registering a pulse both in number of deals and value. Dealmakers are worried. They perceive their tribe will be culled. Deal volume between January 1 and April 15 is down 25 per cent from the same time a year ago, according to ThomsonReuters. “It’s very tough,” says Daniel Kleijn, co-head of M&A in Australia and New Zealand for UBS AG, the No. 1 ranked adviser on M&A in the two countries this year, according to ThomsonReuters.

The number of announced M&A deals, excluding equity market carve outs, open market purchases and withdrawn deals, from January 1 to April 15 is 453 and the value of the deals is $17.72 billion, according to ThomsonReuters. In contrast the S&P/ASX 200 Index between June 30, 2012 and April 15 this year has gained 20 per cent, according to S&P Dow Jones Indices. The S&P/ASX 50 Index, which accounts for 75 per cent of the market value of the ASX, has gained even more. It is up 22 per cent, according to S&P Dow Jones Indices.

M&A bankers say there is a disconnect between the stock market’s performance and business confidence. The global search for yield and millions of dollars of superannuation inflows into the local stock market continue to underpin and bolster share prices. In contrast chief executives, M&A banker say are gloomy. CEOs feel they cannot forecast their own company’s earnings over the next 12 months let alone the earnings of companies they may be interested in buying. Politics is also dampening sentiment, say the bankers. A federal election in September is causing uncertainty as to Australia’s future regulatory environment. Will the mineral resource rent tax, for example, still be in place? Such questions are not encouraging coal and iron ore miners to bid for a competitor.

Even the Australian dollar trading above parity to the greenback and trading strongly against other currencies, making it theoretically cheaper for antipodean CEOs to buy overseas competitors, is no guarantee deal volume will pick up. The history of Australian M&A abroad is one littered with failure. Culturally, Australian companies have yet to develop a comfort or expertise with other cultures, especially in the world’s fastest growing region, Asia.

Australian boards and their M&A bankers hold deep suspicions over the legal and regulatory environment in Asia. They prefer a piecemeal or a softly, softly approach to penetrating Asian markets. Witness ANZ. It prefers to establish branches and build its Asian business organically rather than acquiring banks in the region that would give it immediate impact. Even in regions where cultural differences are not seen as too much for an impediment to deal making, for example Europe, the economic fundamentals are scaring off CEOs. This is not good news for M&A bankers or for investors to be more confident about stocks.