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M&A Isn’t Likely to Stage ‘Major’ Recovery Yet, Shafir Says

There have been more than $420 billion in deals announced so far this quarter, including Warren Buffett’s proposal to buy ketchup maker Heinz with 3G Capital, according to data compiled by Bloomberg. Photographer: Daniel Acker/Bloomberg
There have been more than $420 billion in deals announced so far this quarter, including Warren Buffett’s proposal to buy ketchup maker Heinz with 3G Capital, according to data compiled by Bloomberg. Photographer: Daniel Acker/Bloomberg

Mergers and acquisitions probably aren’t at the start of a “major” recovery because of economic uncertainty, even amid the planned takeovers of companies such as Dell Inc. and H.J. Heinz Co., said Mark Shafir, global co-head of M&A at Citigroup Inc.

While the strong start to the year raised expectations, economic and geopolitical concerns persist, according to a presentation by Shafir at Tulane University’s Corporate Law Institute Conference in New Orleans. U.S. spending cuts, leadership changes in China, and sovereign debt problems in Europe have made corporations skittish about big deals, he said.

“We are not getting the feeling we are in a sustained upturn,” Shafir said. “March is a bit disconcerting.”

Still, M&A performance in the fourth and first quarters show that the right circumstances are in place for dealmaking to accelerate, he said. Shafir, 57, was among the bankers who counseled Sprint Nextel Corp. on its agreement last year to sell a 70 percent stake to Japan’s Softbank Corp. for more than $20 billion.

There have been more than $420 billion in deals announced so far this quarter, including the Dell acquisition and Warren Buffett’s proposal to buy ketchup maker Heinz with 3G Capital, according to data compiled by Bloomberg. The previous quarter yielded $713.6 billion, the strongest period for M&A in more than four years.

‘Underwhelming’ Confidence

Based on prior M&A cycles, there should be more deal activity, Shafir said, citing corporate and political uncertainty and “underwhelming” confidence due to macroeconomic and geopolitical concerns.

“Are we going to see more mega LBOs? I am still skeptical,” he said. “Dell is an unusual situation. There is a strong desire to do it, but I am not convinced we are going back to seeing mega LBOs.”

Separately, an unexpected increase in interest rates could pose another threat to mergers, he said. Central banks have pumped some $9.3 trillion of credit into the market place. When rates increased in 1994, fixed income investors suffered. This is because when interest rates increase, bond prices decline.

“How do you clean up this liquidity without massive disruption in the bond markets?” he said.

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