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M&A expected to increase, but economic uncertainty could delay deals 

By Jack Hagel 
June 13 2012

Mergers and acquisitions of small and midsize companies are expected to increase in the coming year, but the financing environment and disagreements on deal values between sellers and buyers could continue to limit deal volume, a recent survey of M&A advisers indicates.

Fifty-two per cent of advisers expect the volume of M&A deals to remain active in the next 12 months, and 36% expect deals to increase, according to the Nexia International M&A Snapshot Survey. Forty per cent of respondents reported that M&A activity has stayed the same over the past year, while 33% say it has increased.

“The M&A outlook in the United States is more upbeat than in Europe and the UK,” Craig Arends, a partner at CliftonLarsonAllen LLP who helped prepare a report on the survey findings, said in a press release. “M&A activity is expected to hold steady or increase in 2012 due to low interest rates and the record levels of cash held on corporate balance sheets. Debt markets in the US are also generally favourable.”

Nexia, a network of independent accounting and consulting firms, based the report on responses from leaders at 66 of its member firms. Respondents reflected on the outlook for mid-market M&A activity in their respective countries. According to the firms surveyed:

  • Manufacturing, communications technology and health care are expected to be the most active sectors for M&A deals in the next 12 months globally, driven by increases in demand from China and India.

  • Succession planning remains a critical issue for private companies. Private owners are faced with choosing between continuing the business through a challenging economic environment and the prevailing difficulties of raising capital or selling the business at a low price.

  • Difficulties in raising financing and a lack of market confidence, plus an inability to match valuation expectations, may hamper some deals. Some players may need to realign their value expectations to new market realties, the survey indicates.

“There has been a reluctance on the part of sellers to lower their valuations from the highs of the boom years up to 2007–08, despite deepening global economic difficulties,” Charles Simpson, head of corporate finance at UK firm Saffery Champness, said in the report. “In contrast, buyers immediately discounted valuations, and this has resulted in a mismatch, which has kept deal flow static.”

Concerns over the future of the euro continue to deter prospective buyers interested in European businesses, the report said. But buyers who have built up cash reserves during the good times may be looking for higher returns and quality businesses in which to invest.

US sellers seem willing to negotiate on price, the report said, but economic concerns there may be an obstacle to some deals.

“The US jobs market has improved but remains sluggish,” Arends said in the report. “Add to this the uncertainty caused by events in the eurozone, and the US presidential elections, and the result is a nervous global economic environment.”

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Jack Hagel (jhagel@aicpa.org) is the editorial director of CGMA Magazine.

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