Merger Activity Was Down but Not Out in First Half

A long-awaited rebound in mergers is taking its time to arrive. But for all the hand-wringing by bankers and lawyers, the business of arranging deals has not quite disappeared yet.

Despite a strong start that yielded four blockbuster transactions in one week, the first half of 2013 was the slowest first six months for mergers in four years. About $996.8 billion worth of deals was announced during that time, down 13 percent from the amount in the period a year earlier, according to data from Thomson Reuters.

The slack pace of corporate tie-ups has confounded many advisers, who continue to see an abundance of the traditional building blocks of a merger boom.

“We’re seeing buyers and sellers talk about deals, only to see them die in the marketplace,” said Scott Barshay, the head of the corporate department at the law fim Cravath, Swaine & Moore. “All year, buyers have been willing to pull the trigger only if their deal, on a scale of one to 10, is a 9 or a 10.”

The ability to borrow money cheaply remains at near-historic lows, giving corporate buyers and private equity firms alike relatively low costs for their acquisitions. And the stock markets â€" which historically track closely to the mergers market â€" rose rapidly for much of the first half.

Some of the biggest deals of the last several years arose during the first half, including Dell’s proposed $24.4 billion sale to its founder; H.J. Heinz’s planned $23 billion takeover by Berkshire Hathaway and 3G Capital; and Ther! mo Fisher Scientific’s $13.6 billion purchase of Life Technologies.

In some ways, however, the factors that should be helping build a merger boom may instead be limiting it.

The market values of many potential sellers have kept rising, convincing them to bet on sustained growth instead of risking selling out too cheaply. Privately held companies, including those owned by private equity firms, have weighed going public instead of pursuing a deal. Would-be buyers have also become leery of paying too much.

And some companies have taken advantage of cheap financing to help themselves and their shareholders by buying back stock or issuing special dividends.

At the same time, recent gyrations in the markets along with concerns that the Federal Reserve may begin pulling back on its economic stimulus have left buyers and sellers â€" many of whom still bear scars from the fall of 2008 â€" unsure of whether now is the time to strike a deal.

“I think the reason activity is more uted is that many of today’s decision-makers were also in very important seats during the financial crisis,” said Michael Carr, the head of Americas mergers and acquisitions at Goldman Sachs. “They saw what happened in the markets, and those memories will take a long time to fade.”

Corporate boardrooms remain filled with an openness to consider mergers, said Vito Sperduto, the head of United States mergers and acquisitions at RBC Capital Markets. But investors are unlikely to penalize companies for sitting on the sidelines for now.

“You get questioned if you don’t participate in the M.&A. cycle, but you won’t lose your job,” he said.

A number of industries that witnessed rapid-fire deal-making last year slumped in the first half. Among them was the energy sector, where a new oil rush had led to a frenzy of m! ergers. Y! et the volume of transactions announced through June 30 slumped 28.4 percent compared with figures in the period a year earlier, to $147 billion.

Not all the market data point to gloom, however. The value of mergers struck within the Americas rose 5.3 percent, to $514.4 billion. The volume struck in the United States, the longtime center of the deal industry, jumped 25.1 percent, to $431.4 billion.

And a number of industries are showing signs of bustling activity. The health care sector, a perennially busy area, experienced a 15.7 percent increase in mergers, to $95.5 billion. Consumer products rose 26.6 percent, to $36.1 billion worth of deals.

The telecommunications sector, which posted a 4.6 percent gain in deal activity, is expected to heat up as wireless service providers and cable companies ponder a new wave of consolidation.

And private equity firms, the consummate deal makers of the corporate world, have stayed busy despite wariness over the high valuations of potential tagets. Leveraged buyouts rose 33.8 percent for the half, to $163.2 billion worth of transactions.

“The market is a lot healthier than the numbers look,” said Robert Eatroff, a co-head of mergers and acquisitions for the Americas at Morgan Stanley. “There are pockets of real activity.”

For the first half of the year, Goldman Sachs claimed the top spot among financial advisers, having worked on 161 deals worth nearly $249 billion. Among its assignments are Virgin Media’s sale to Liberty Global and Dell’s proposed buyout.

Among law firms, Davis Polk & Wardwell led the way with 53 mergers worth $120.2 billion. The firm is working on the sale of Heinz and Dell and Comcast’s full takeover of NBC Universal from General Electric.