While the number of transactions in the United States was flat in 2011, these factors, along with an increasing interest in healthcare, power & utilities and technology have brought a strong focus on acquisitions back into the corporate boardroom. "Despite the slowdown in transactions over the past few years, fundamentals have risen to their strongest point since the financial crisis began," says Rich Jeanneret, Americas Vice-Chair, Transaction Advisory Services at Ernst & Young. "Corporates are starting to put fundamentals over continued economic uncertainty and are acting on these dynamics to execute deals."
Private equity's split personality in 2011
Private equity increased momentum through the first part of 2011 evidenced by bigger deals and larger exits, including two record breaking IPOs. However, halfway through 2011 activity slowed down impacted by the sovereign debt crisis, deficit reduction impasse and a growing concern about a slowing economy. As a result, both buy-side and sell-side private equity activity suffered in the second half relative to 2010. For the year, private equity activity decreased 19% in value to $138.1 billion, while the number of deals remained flat, declining only 1%, at 914 deals. Fund-raising declined 7% year-over-year to $207.6 billion in committed capital.
"At the beginning of 2011, private equity was exhibiting increased activity on both the buy and sell side representing a continued recovery from the lows of 2009. As the year progressed, the volatile economy and political environment took its toll on private equity activity as financing markets were less receptive and the market for IPO's dried up," says Jeffrey Bunder, Ernst & Young's Global Private Equity Leader. "Deals are taking longer to complete and for private equity firms financing continues to be more difficult to obtain, impacting the volume of transactions. As we look forward, there is some optimism that January will exhibit a 'restart,' characterized by improved financing conditions and more stable equity markets. More certainty in the economic outlook should fuel an increase in private equity volume and bolster both acquisitions and exits. We do expect to see continued private equity activity in healthcare, energy and technology in 2012, sectors that have remained active through choppy market conditions."
Fortune 1000 Companies continue to hold a tremendous amount of cash on their balance sheets and have over $2 trillion in cash. Access to credit has also steadily improved since 2009. According to an Ernst & Young survey, global companies believe credit markets are strong enough to support growth plans and 68% of larger cap respondents say credit availability is stable to very positive.
In addition to available capital and easing credit markets, buyer-seller expectation gaps are narrowing and valuations are stabilizing. Fifty-five percent of US companies expect asset prices to remain at current levels over the next six months and 36% of US companies say they will pull the trigger on an acquisition in the next year, according to the Ernst & Young survey.
"With improving valuations, available capital and easing credit markets we are starting to see M&A and market volatility subsist simultaneously," says Steve Krouskos, Ernst & Young's Global and Americas Markets Leader for Transaction Advisory Services. "With an infusion of confidence in 2012 we can expect to see more deals in the pipeline. Those companies who learned from the crisis and managed their capital agenda will have an advantage to seize opportunities for growth. While geo-political and macroeconomic uncertainties have restrained deal activity there is desire in the board room for dealmaking."