Dow Chemical's ugly end to 2008, with its stock decimated and its acquisition of rival Rohm & Haas in doubt, is emblematic of the state of M&A in the new year: conservative and fearful
If the last few days of 2008 are a sign of things to come, the prospects for mergers and acquisitions in the new year are certainly bleak. The latest evidence is the trouble facing Dow Chemical's (DOW) proposed $15.3 billion acquisition of rival Rohm & Haas (ROH). The deal was put in doubt Dec. 29 after the Kuwait government cancelled a joint venture with Dow that would have indirectly provided key financing for the buyout.
The Rohm & Haas deal could be saved or renegotiated, but if it's cancelled it would hardly be a rarity in such a troubled climate for mergers and acquisitions. According to preliminary data from Dealogic, 1,309 M&A deals, totaling $911 billion, were scrapped in 2008. Deal volume in the U.S. is off 29% from 2007, but M&A activity has all but halted more recently.
Deal Market Falters as Capital Dries Up
U.S. deal volume plunged 86% in November 2008 compared to the previous November, according to R.W. Baird. "It's a staggering number" that reflects the fall's sharp tightening of credit markets and fears of a global economic slowdown, says Baird investment banker Howard Lanser. "December isn't looking any better."
The past year "was a horror show," says William Lawlor, a partner and M&A specialist at the Dechert law firm.
The primary problem was the drying up of credit markets. Since the fall, even well-respected companies have found it hard to borrow to finance acquisitions. Never mind the riskier private equity shops: Their access to capital dried up earlier in 2008, with Dealogic estimating financial sponsor M&A buyouts fell 71% in the past year.
A second problem is fear: Executives and boards, along with stock investors and lenders, have trouble predicting where the economic and financial environment will take their companies. "If you don't have that confidence as a catalyst, deals just don't get done," Lawlor says.
"Mergers of Necessity"
Still, companies remain hungry to make acquisitions for a variety of reasons. Many deals under consideration are "mergers of necessity," says Robert Filek, a partner in PricewaterhouseCoopers' Transaction Services Group. Companies are "forced into [deals] by economic realities." Companies may need to sell assets to raise capital, he says. Or weaker rivals may need to be swallowed up by stronger competitors, which can then cut costs in the merged company. The troubled financial sector was a hotbed of these sorts of deals, with Bank of America's (BAC) $44.3 billion buyout of Merrill Lynch (MER) one of many examples.
In 2009 companies may be able to take advantage of opportunities created by market turbulence. The stock market is pricing companies at "great deals," Lawlor says. "There's just too much opportunity out there."
Marino Marin, managing director at New York-based investment bank Gruppo, Levey & Co., predicts dealmakers in 2009 could look for M&A possibilities in industries like mining, health care, media, and technology. Baird's Lanser predicts deals in technology, health care, and education and training outfits. He says private equity investors, with about $350 billion "in capital sitting on the sidelines," may also start hunting for opportunities.
Sluggish Credit, Uncertain Outlook
But even those optimistic about the M&A environment admit conditions must change before buyers start making, rather than cancelling, big deals. Credit markets have recovered somewhat since October. But that is only after "an almost complete failure of the banking system in the United States," Lanser says. "Banks are still hoarding money" needed to finance deals, he says. "You've got a bottleneck in credit."
And then there is the general uncertainty that hangs like a dark cloud over the entire economy. Filek offers two extreme examples: In the energy industry, the big swings in fuel prices scramble all calculations of oil and gas firms' future financial results. That makes energy executives reluctant to pursue deals. Meanwhile, consolidation in the automotive sector is being prevented by big questions about the future of the U.S. auto industry. "Automotive M&A can't get rolling until there is some visibility into what a restructured U.S. auto industry looks like," he says.
The best hope for a revival in M&A comes from a gradual stabilization of both the economic environment and the credit markets. "With the new year comes new hope," Lanser says. Until then, Marin says, bankers will need to be "very creative" to get deals done.
Efforts to save the Rohm & Haas buyout may be an early 2009 test of the ability to get deals completed despite the toughest M&A conditions in a generation.