Deal Outlook in Europe Remains Gloomy

LONDON - Sitting in a conference room in JPMorgan Chase’s plush offices in London’s financial district, Hernan Cristerna is in a reflective mood

As the new global co-head of the bank’s mergers and acquisitions division, the 48-year-old Spaniard is charged with navigating his team through a faltering deal market that has yet to recover to pre-crisis levels.

While a number of megadeals have been announced so far this year, global merger activity in the first half of 2013 is down 13 percent, to $996.8 billion, over the same period last year, according to the data provider Thomson Reuters.

And in Europe, the trend is even more pronounced.

The number of announed European deals fell 43 percent, to $221 billion, in the first six months of the year, and Mr. Cristerna and his counterparts at the other major global investment banks have been left scratching their heads over how to get deals done.

“At the U.S. Open, the best players in the world couldn’t break par. It’s the same for our industry,” said the JPMorgan co-head, who runs the mergers and acquisitions unit with his New York-based colleague, Chris Ventresca. “The best M.&A. professionals are unable to get the ball anywhere near the flag. And when we get on the green, we face very long puts for par. We can’t beat the course.”

Many of the troubles facing Europe’s dealmakers stem from the Continent’s lackluster economy.
Unlike the United States, whose economy grew 1.8! percent in the first quarter of the year, the European Union’s gross domestic product fell 0.1 percent over the same period. Unemployment in the European Union also now stands at 12.1 percent, versus 7.6 percent in the U.S.

Analysts and bankers say Europe’s weak growth - and concerns that local politicians are not taking the right steps to improve the Continent’s competitiveness - continues to sap confidence, leading many executives to postpone acquisitions in the hopes that market volatility will eventually calm down.

“The euro crisis has become the new normal,” said Scott Moeller, director of the M&A research center at the Cass Business School in London. “It’s hard to see any big European deals happening for some time to come.”

For Mr. Cristerna of JPMorgan, Europe’s corporate leades have to be bolder.

With economic green shoots a distant memory, local companies should tap into their mounting cash stockpiles and ready access to financing from the capital markets to fund deals, which will add potential revenue or allow access to new markets, according to the Spanish banker.

Mr. Cristerna adds that chief executives also must fend off growing calls from shareholders for buybacks, as investors fret that market volatility and poor economic growth continue to hit companies’ stock prices.

“On deals they believe in, C.E.O.’s can’t be intimidated by investor demands,” said Mr. Cristerna, who joined JPMorgan from Schroders in 1996 and holds an M.B.A. from Harvard Business School. “Not enough C.E.O.’s are making the case for deals. C.E.O.’s have to get on with their own agenda.”

So far this year, not many corporate leaders have been willing to follow Mr. Cristerna’s advice.

To date, the largest European deals have both come from the cable ! industry,! which analysts say continues to offer steady returns because of local consumers’ insatiable appetite for data streamed through their smartphones and high speed broadband connections.

Last month, the British telecommunications giant Vodafone agreed to buy the German cable operator Kabel Deutschland for $10.1 billion, while John C. Malone’s Liberty Global has acquired the British cable company Virgin Media for $16 billion.

Yet analysts warn that expectations of a revival in the European M&A market is likely misplced.

“These deals haven’t kicked off a round of other big deals,” said Mr. Moeller of Cass Business School. “Overall, Europe remains depressed.”

For Mr. Cristerna and his rivals at the likes of Goldman Sachs and Deutsche Bank, the hope remains that a rebounding U.S. economy and increased interest from Asian buyers will eventually rekindle Europe’s M.&A. market - and help them pocket multi-million dollar advisory fees.

Many of the Continent’s largest companies, including the German engineering giant Siemens and the French retailer Carrefour, have extensive global operations, and are increasingly turning to international expansion, particularly in emerging economi! es, to of! fset weak demand in their home markets.

“We have to place our bets,” said the Spanish banker, who advised the European coffee and tea company D.E. Master Blenders on its $9.8 billion sale to Joh. A. Benckiser in April. “I’m an optimist at heart and believe that many of the potential deals we are working on have a good chance of coming to fruition.”