Corporate boards are more optimistic about prospects for the U.S. economy than the general public is, said Timothy J. Ingrassia, head of mergers and acquisitions in the Americas for Goldman Sachs Group Inc.
“I do think there’s a little more optimism in the boardroom than you read in the newspapers,” Ingrassia, 46, said at the Bloomberg Dealmakers Summit in New York today. “We’ve sensed a significant pickup in the brainstorming and white-boarding around activity that gives us some optimism about the merger market looking forward.”
The third quarter was the busiest in two years for mergers, with $566.5 billion of announced transactions, according to data compiled by Bloomberg. BHP Billiton Ltd. made an unsolicited $40 billion offer for Potash Corp. of Saskatchewan Inc., Sanofi- Aventis SA began its pursuit of Genzyme Corp. for at least $18.5 billion, and Intel Corp. announced its largest acquisition, the $7.7 billion takeover of security-software maker McAfee Inc.
With almost $3 trillion of cash, companies drove a 60 percent increase in takeovers from a year ago, Bloomberg data show. Record-low borrowing costs encouraged dealmaking as the Standard & Poor’s 500 Index headed for its best September since 1939. Even more important will be the pace of economic recovery, Peter Weinberg, founding partner of Perella Weinberg Partners LP, said today at the conference.
“The big question mark is, where are we going and where is the economy going,” Weinberg, 53, said. “The success of any merger will be determined more so by the environment than by the deal price. Even though there are many factors that suggest a significant increase in activity, there’s still one big question out there that’s on everybody’s mind.”
The U.S. economy grew at a 1.7 percent annual rate in the second quarter, marking the start of a slowdown in growth that has concerned the Federal Reserve. That’s down from a 3.7 percent rate in the first quarter and 5 percent in last year’s fourth quarter.
“In boardrooms, there is a reluctance to get involved in significant transactions because of the lack of certainty,” Martin Lipton, 79, founding partner of Wachtell, Lipton, Rosen & Katz, said at the conference. “I personally doubt there will be great increases in activity in M&A until we have a restoration of confidence as to where the economy is going.”
The financial system is in a slow state of recovery and areas such as basic middle-market lending are “a very, very long way from real health,” Evercore Partners Inc. Chairman Roger Altman, 64, said.
Commercial and industrial loans at U.S. banks fell 24 percent from their 2008 peak to $1.24 trillion as of August, according to Federal Reserve data.
Completed global deals were $1.16 trillion so far this year, up 3.6 percent from a year earlier, according to data compiled by Bloomberg. Total announced takeovers were $1.49 trillion in the first nine months of 2010, compared with $1.76 trillion in all of 2009.
Financial institutions and health-care companies will be among the most active sectors, Weinberg said.
Lazard Ltd. Vice Chairman Gary W. Parr said the pace of financial-industry takeovers will be held back by doubts over the value of bank assets and questions about new capital requirements from regulators.
Banks worldwide will need $500 billion to $1 trillion of new capital over the next few years after having raised about $1.6 trillion since the financial crisis, Parr said. Regulators may push for higher capital levels faster than proposals from the Basel Committee on Banking Supervision, which phase in the new requirements from 2013 to 2023, he said.
“A lot of regulators around the world are applying pressure to their regulated entities and saying that we want you to be better capitalized sooner,” Parr said. Banks could get the capital from earnings if given enough time, as U.S. and European lenders together generate about $400 billion a year in net income, Parr said.
Tony James, president of Blackstone Group LP, said there isn’t enough capital available from investors to fund all the opportunities he sees in the market, while Carlyle Group co-founder David Rubenstein said private-equity firms are having to cut their fees as fundraising becomes more difficult.
Thomas Barrack, chairman of private-equity firm Colony Capital LLC, said his best investment opportunities can be found in the U.S.
The S&P 500 Index rallied 80 percent from its bear market low in March 2009 through April 23 of this year, data compiled by Bloomberg show. The benchmark gauge for U.S. equities then retreated 16 percent through July 2 and has since rebounded 12 percent.
“They are more confident that we’ll be in a sluggish environment as opposed to a double-dip,” said Blair Effron, co-founder of Centerview Partners. “If you ask most companies, they’ll say that the next five years will be much more difficult than the five years before the downturn.”
Wall Street will probably have to eliminate about 80,000 jobs in coming months and year-end bonuses will “disappoint dramatically,” Meredith Whitney, founder of Meredith Whitney Advisory Group, said today in a separate interview on Bloomberg Radio.