In the last two quarters of 2010, after a period of high market volatility and the European sovereign-debt crisis in the first half the year, encouraging signs of economic recovery was correspondingly accompanied by improved M&A activity.
Some of the most notable trends in 2010 included a resurgence in cross-border deal-making, and higher levels of M&A activity in emerging markets (76.2% increase from 2009 These trends are expected to continue in 2011 provided that they are not disrupted by major economic downturns.
The positive news has many commentators speculating that the conditions are ripe in the year ahead for a boom in M&A activity, or at least further improvements. It has been noted that statistics show 2011 to date has been the strongest start to M&A activity since 2000. as well as the viability of debt financing options.
Companies that are limited in internally generating growth are likely to seize the opportunities that the softer economic conditions present to expand market share and gain access to new products and technologies.
McKinsey argues that the cost of capital will increase in the long term, which may fuel higher M&A activity in the short term as borrowing rates remain low.
Although there are many positive signs for trends in M&A activity to continue, as with 2010, a boom in M&A may not occur in the case of major disruptions to economic recovery. Companies may be wary of uncertain or slower economic recovery in some countries – particularly where unemployment remains high, and disproportionate inflation and growth levels exist. The debt-crisis in Europe still remains to be completely resolved, an cumulatively particular regions of the globe may not experience the same prosperity in deals as other regions such as Asia and Latin America.
Regulatory hurdles will also be an interesting point to observe for many of the larger deals such as the proposed merger between Deutsche Borse and NYSE Euronext, which is expected to create one of the largest derivatives markets as a combined entity. In 2010, some of the headline proposals (NAB and AXA Asia-Pacific; BHP Billiton and Potash) came to an end as they failed to overcome such barriers.
The general outlook for M&A in 2011 looks positive based on trends from 2010 and existing conditions, although a little bit of scepticism is never unwarranted. Regionally, Asia and the emerging markets will likely continue to grow into a significant part of the M&A market in 2011.