Mergers & Acquisitions 2012: Overall Deal Volume Expected to Improve, Says Expert (EXCLUSIVE)

This year could be an interesting one for Mergers & Acquisitions (M&A) related activities, with the likelihood for improvement in overall deal volumes; although, given the cautious optimism in the global economy, any exponential growth in deals seems far from the reality, according to an expert in the field.

In an exclusive interview with IBTimes, Nitin Kumar, who serves as Strategic Advisor to the Board for The Association of Due Diligence Professionals (ADDP) and was selected by Grant Thornton and the Alliance of Mergers & Acquisition Advisors (AM&AA) as one of the thought leaders of the year, for his contributions to the profession, said there would be plenty of opportunities in 2012 for deal-making and also be some real challenges to overcome.

Excerpts from the first of a three-part interview are presented below:

How do you rate the major M&A activities for last year (2011)?

Overall, 2011 was a marked improvement over 2010; global M&A activity was certainly higher. There was cautious optimism and some reasonably large-sized deals did occur - like Texas Instruments acquiring National Semiconductors in a mammoth tech deal.The uncertainty in the global markets did slow down M&A activity quite a bit towards the 3rd and 4th quarters for last year. In the early part of 2011, a lot of private equity firms played the exit game and divested their portfolio companies, a trend likely to be visible in 2012 as well.

Could M&A activity be considered a smart strategy move in the present economic situation?The overall pace of GDP growth in developed economies is likely to remain sluggish, thus making organic growth a bit of a challenge; hence M&A are the right way to go if business leaders are seeking growth. This will be bolstered by three major drivers - the first is the lower valuations of companies in the current marketplace, which makes deals attractive to companies prepared to move quickly. The second is that private equity is sitting on a lot of cash and is looking for good deals all the time, albeit the pace of investment is going to be slower than in the past, with due diligence being a lot stricter than the bygone years.Finally, there is a lot of currency volatility in the market as of now and this is likely to continue given the recent fluctuations in the U.S. dollar, the whole EU situation and massive strength gain by the Australian dollar and Swiss franc. The relative strength and weaknesses of currencies can produce some attractive deals, which were not within reach earlier.The challenges with respect to access to capital to fund these acquisitions still remains somewhat of an issue that will need to be overcome on a case-to-case basis, unlike a few years ago.

Is 2012 going to an optimistic year for M&A activity?Although we entered 2012 with a big bang, with several multi-billion dollar deals already announced, the overall outlook remains mixed. The trend I see emerging, based on looking at deals like Bristol-Myers Squibb's $2.5 billion acquisition of Inhibitex, is clearly that companies are prepared to move when an opportunity comes. These decisions by business leaders will be based on the three drivers I mentioned earlier and the relative financial position of their companies. For someone sitting on a cash reserve, life might be easier and quicker than someone who is seeking debt financing.

Is there sufficient confidence in the market to go for M&A?Economic growth is likely to remain the single biggest obstacle for deal-making as per a recent report, published by the Pepperdine University, which was based on surveying several companies in the Mid-Market. Another Bloomberg report I read recently suggested targets in U.S. and Europe are most attractive from a valuation standpoint; this might be a great opportunity for businesses in high GDP-growth countries or countries whose currencies are in a relative position of strength.There are also some policy level and regulatory changes that could trigger transactions in 2012 across the U.S. and Europe, especially in the financial services industry.

Watch out for the second part of the interview tomorrow...