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Urge to merge back on agenda

Wall Street went cold on mergers and acquisitions in the middle of last year, but the new year could see some marriages made in heaven.

Wall Street went cold on mergers and acquisitions in the middle of last year, but the new year could see some marriages made in heaven.

DURING the traditionally quiet news period that happens around new year, celebrities kept journalists happy with a cavalcade of engagement announcements. From Michael Jordan and Matthew McConaughey to Steven Tyler and Britney Spears, it appears the most popular thing to do on your holiday was to propose.

That is unless you are a Wall Street type, in which case there was far less love being felt. In fact, despite highly eligible companies having stockpiles of cash to show off and cheap debt available, few are willing to make that big commitment and propose a union of their own with another company.

That is not a new story. Companies started getting cold feet about pursuing mergers and acquisitions around July last year. While the first half of 2011 saw a flurry of companies around the world tying the knot, the value of deals in the second half of last year fell 19 per cent globally to $US1.1 trillion.

Why did deals fall off a cliff in July? If you cast your mind back, there were several reasons why companies became more risk-averse. The US Congress was sounding like it might allow the country to default on its loans and European markets fell the most they have since October 2008 as the full scale of the euro-zone crisis started to be comprehended. Both were viewed by companies as good reasons to sit on cash and ride out the uncertainty.

Some companies, though, still managed to get their groove on. Kinder Morgan freed itself of $US21 billion to take out El Paso Gilead Sciences, the world's largest maker of HIV medicines, spent $US11 billion to win over its soul mate, Pharmasset, the company working on a treatment for hepatitis C, while US private equity firm KKR picked up shale driller Samson Investment for $US7.2 billion.

The good news for the US is that those three deals, the biggest worldwide last year, all involved American companies. Global companies also continued to seek out big US investment banks to help seal deals.

Goldman Sachs overtook Morgan Stanley as 2011's top financial adviser for M&A, commanding $US640 billion in deals, while Morgan Stanley finished second with $US498 billion. JPMorgan Chase, Credit Suisse and Bank of America Merrill Lynch rounded out the top five, according to Thomson Reuters.

But the $US2.5 trillion of takeovers last year is still off its 2007 peak of $US3.8 trillion. So will 2012 see more companies take out singles ads, or will they continue to be as commitment phobic as they were towards the end of last year?

A recent Ernst & Young study shows that the 2012 M&A market could give the US sharemarket a shot in the arm after stocks ended 2011 at levels similar to which they started.

Ernst & Young says about 36 per cent of companies are preparing to take the plunge and pursue an acquisition this year.

Energy and healthcare were two shining M&A lights in 2011 and they look set to see more action this year. Experts predict the retail, industrial and technology sectors could also see a rise in M&A activity.

But mergers and acquisitions are just one way of realising value, and some are warning that companies may opt to continue a growth strategy that gained pace in 2011 spinning off business units into separate companies.

There were about 76 completed spinoffs in 2011, according to corporate analytics firm Dealogic, up from 50 in 2010. With companies such as Kraft and ConocoPhillips leading the charge, the value of those spinoffs reached $US115.9 billion, more than twice the value realised in 2010.

Whether companies decide 2012 is a year for making up or breaking up is likely to be determined again by Europe and the ability of the US Congress to make level-headed decisions that don't send shock waves through the market.

Europe's situation, though, is harder to anticipate. Sure, a European recession looks like the best possible outcome, but even that eventuality will involve many twists and turns that are likely to make companies around the world cautious.

Mark Shafir, Citigroup's head of M&A, says companies are waiting to have more confidence that the euro zone is not going to come undone. He believes that once that is resolved, companies will start to come out of hiding and pounce on anything that shows a little bit of value.

I think he is right. The feeling around Wall Street is that this year could be big for M&As but with potentially more smaller deals than kingmakers, and that the corporate hawks will only feel comfortable circling if Europe has settled down.

The end result seems to point to a healthy M&A market in 2012 unless there are more stumbles in Europe. If the Ernst and Young survey is to be believed, more than a third of companies appear ready to take a few more risks in 2012 and achieve growth through acquisitions.

After all, if Michael Jordan can forget about his $US168 million divorce and take the plunge again, is there really anything stopping companies from getting their M&A mojo back?

Twitter: mathewmurphy81

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