Mergers & Acquisitions 2012: Volatile Market Situation Demands Stronger Capability, Strategy and Capital, Says Expert (EXCLUSIVE)

In today's volatile markets, for buyers, building stronger Mergers & Acquisitions (M&A) capability, strategy, capital and integration skills will enable them to capitalize on quick deals and monetize new assets quickly after deal close 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 that sellers will be looking for speed as well as certainty of deal closure with equal importance and will need to be realistic about valuations.

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

Which are the major sectors where M&A activities will be intensifying?

There are certainly a few sectors which are likely to see more activity than others, based on a set of industry-specific drivers. There is a lot happening in the technology sector, especially the convergence of TMT (Technology, Media and Telecom) and the advent of disruptive technologies like mobile apps, cloud computing and social media, which will drive a lot more deal activity. Technology companies generally have lower debt levels and higher cash reserves, enabling them to move quicker and smarter. This trend will likely continue the momentum into 2012 as well.

The Banking industry that has been the epicenter of the global economic mayhem is always on the radar of investors, regulators, customers and competitors. While several banks across the U.S. and Europe have ceased to exist, there is still a lot happening in that world. Banks have been asked repeatedly to restructure and prove long-term solvency. As I look at the issue, they are likely to divest non-banking businesses like asset management and securities. Some of these banks could create separate entities like a good bank and bad bank scenario and some of them might make a strategic decision to separate their insurance businesses, while some others might adopt a strategy to separate their investment banking operations from their retail banking businesses. In my opinion, this wave is just about coming and it is only matter of time before banks will choose to focus on a few core high-value generating activities. In Europe there is a mandate that will force some of this.

Banks in the U.S. and the EU are also contemplating retreating from their smaller foreign operations, which will potentially create acquisition opportunities for both local and global competitors and trigger some M&A activity. While this trend is likely to continue over a few years, I am confident that 2012 is likely to kick this off with some interesting announcements.

Energy and Utilities are always an interesting sector to watch and several surveys have pointed to heavy consolidation in 2012. The rise of pharmaceutical companies from emerging markets will see some heavy interest in American and European companies where valuations could be attractive.

Will M&A activities provide the much needed stimulation for markets in 2012?

The Eurozone crisis is very real with no easy solutions in sight, even if the current sets of proposed solutions do temporarily resolve this; its long-term impact still remains largely unknown. Things might not go back to boom years for M&A but the current volatility also will not last forever. There are some temporary effects and some permanent implications of this; the days of obtaining easy financing are thought to be permanently gone and this will severely impede the ability of the mid-market businesses to grow non-organically.

Will the probability of recession in the Eurozone impact M&A activities?

One needs to remember that Europe is an amalgamation of several small and medium-sized economies, some of which are still growing at a fantastic pace...Turkey being one strong example. There are several potential seller nations like Italy, Greece and Spain who could offload assets in some of these faster growing economies to strengthen their capital positions. Private equity funds from countries like Turkey are also keenly watching the European crisis play out and would be eager to make a deal or two in 2012.

Regulations like the EU state aid requirements will also force the banking industry to divest some assets by the end of the year; the current valuations of banks are near an all-time low, which makes it very attractive to diligent buyers. Effective due diligence, realistic valuations and rock solid integration planning from eligible buyers could drive more deals and have a positive effect on the markets.The Eurozone crisis has, however, taken its toll creating psychological hurdles through high uncertainty, volatility, a risk averse mood and funding barriers and these problems have to be overcome before deal activity can return to normal.

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