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LONDON - Merger and acquisition activity is set to stay strong in 2007 after reaching an all-time record in 2006, driven by growth in European corporate deals and leveraged buyouts in the United States, bankers have said.
And with buoyant stock markets, a relatively benign political environment and strong debt markets where banks are offering great terms for financing potential acquisitions, the run looks set to extend into 2007.
"It looks robust for next year," said Dag Skattum, global co-head of mergers and acquisitions at JP Morgan.
In 2006, the level of activity in Europe was so intense, driven mainly by the utilities, steel and financial sectors, that the region overtook the US in terms of volumes in the first three quarters of 2006 before the US clawed back its traditional lead in the fourth.
"A big portion of the M&A market is now represented by continental Europe," said Piero Novelli, global co-head of mergers and acquisitions at investment bank UBS AG. "There are sectors that were screaming for consolidation like financial institutions, utilities and industrial companies."
Deals worldwide in 2006 totalled US$3.6 trillion ($5.2 trillion), dwarfing the previous year's US$2.7 trillion total, according to preliminary numbers from data provider Thomson Financial. All valuations used in Thomson's tables and this article include debt assumed.
In Europe, long-awaited consolidation accelerated as the single market, common currency and removal of protective regulatory regimes led to ambitious bids such as E.ON's US$71 billion bid for Spanish rival Endesa and Banca Intesa's US$38 billion takeover of rival Sanpaolo-IMI.
Among regulatory developments underpinning this growth are the opening up of European markets and interventions by the European Union to enforce European laws.
The Brussels-based body for example forced Spain to backtrack on hurdles it had placed in the way of E.ON's bid.
And in Italy, where former Bank of Italy governor Antonio Fazio had stifled consolidation between banks in the country's fragmented financial services market, his successor, Mario Draghi, has actively encouraged them to merge.
"Europe had historically been slower to consolidate across basic industries than the US, so there is scope to catch up," said Susan Kilsby, head of European M&A at Credit Suisse. "That's one reason that Europe has had such a solid year in M&A."
In the United States, which is still by a whisker the biggest market for M&A worldwide with announced deals worth US$1.5 trillion so far in 2006 compared with Europe's US$1.4 trillion, jumbo-sized LBOs helped drive mergers and acquisitions
Among such mega deals were the acquisition of hospital operator HCA Inc. for US$32 billion by buyout firms Kohlberg Kravis Roberts, Bain Capital and Merrill Lynch Private Equity.
These monster deals are expected to hit Europe next year as buyout firms seek targets big enough to allow them to outflank competitors as they hustle to put their huge funds to work on deals.
"I suspect private equity activity will be higher in Europe next year as there is a lot of pent-up demand," said Tony Burgess, head of European M&A at Deutsche Bank, which came number 1 in the UK, Europe's biggest M&A market.
"In Europe there are a number of larger, more mature and undergeared companies and I suspect you'll see some large public to privates next year."
Some bankers said other trends from the US may move over to Europe next year, including a resurgence in telecommunications deals. The biggest telecoms deal in 2006 worldwide was the acquisition of BellSouth by AT&T Corp for US$89 billion.
And while so far a majority of deals have been cash-based due to the availability of cheap borrowings and the prevalence of private equity, the cycle looks unlikely to shift towards share-deals in the near future.
"There is still so much debt available I think overall people will try to do as much in cash as they possibly can," said Gavin Macdonald, head of European and Asian M&A at Morgan Stanley, which led the European M&A rankings in 2006.
"As long as credit markets stay as they are the first preference for deals will be cash."
The ready availability of cash and reluctance of companies to fall behind rivals -- plus the proliferation of so-called activist investors who are willing to challenge management -- could lead to more hostile or unsolicited bid situations.
"People are becoming more decisive when they want to chase an acquisition target," said Carlo Calabria, vice chairman and head of European M&A at Merrill Lynch.
- REUTERS
