Record levels of corporate cash and historically low interest rates may provide the catalysts to fuel a rise in the level of merger and acquisition (M&A) activity this year, according to a survey of 825 executives conducted by KPMG and Knowledge@Wharton, the research and analysis arm of The Wharton School of the University of Pennsylvania.
Executives reported that large corporate cash reserves and commitments (48 per cent of respondents) and low interest rates (44 per cent) should lead to more M&A activity.
"In the US, we’ll likely continue to see M&A activity move sideways, but with a slight upward trend," said Dan Tiemann, KPMG’s global lead partner for Transaction Services. "There is a lot of cash on corporate balance sheets sitting here today, and, in the US, the debt markets in general are favourable."
Nearly seven of 10 respondents expected their companies to make at least one acquisition in 2012, compared with 57 per cent in 2011. Some 29 per cent of executives said the need to expand geographic reach was the primary M&A motivator, while the need for entering new lines of business and expanding their customer bases were the next two most popular rationales, cited by 18 per cent and 17 per cent of respondents, respectively.
The private equity (PE) sphere also should be active in 2012, also because of cash for investment and the perceived need to expand reach.
"For private equity, we have seen an expansion in geographic reach from many of the PE firm clients," says Marc Moyers, KPMG’s national sector leader for private equity. "Firms are raising funds and opening offices in emerging markets and diversifying their product platforms. This will give them greater flexibility and opportunity to grow their businesses."
Despite favourable signs, deals are expected to be smaller, with 68 per cent of respondents reporting that they expect enterprise values to come in at less than $250 million this year, with 42 per cent saying they expected most of the M&A activity to be in financial services, followed by telecommunications and technology, each with 32 per cent. Other industries that are expected to be active are healthcare and pharmaceuticals (26 per cent), and energy (22 per cent).
Interest in emerging markets notwithstanding, respondents expect most of this year’s deals to occur in North America (62 per cent), followed by China (36 per cent), Western Europe (30 per cent), and Brazil (20 per cent). Some observers were concerned about continued economic turmoil in Europe and its effect.
"The crisis in Europe affects the overall outlook and makes companies more cautious," says Bulent Gultekin, a professor of finance at Wharton.
