Pondering a Drought in Merger Deals

Such is the optimism of the deal maker that, even with the downturn in activity in the first half of the year, some say a recovery in mergers and acquisitions is just around the corner.

But is that sunny outlook justified?

That is the uncomfortable question raised in a report from Ernst & Young released on Monday, which proposes that the deal-making slump may be more than just a passing phase. Amid persistent economic and political uncertainty, there may be a “fundamental reset” in deal volume, the report says.

“You can’t ignore it,” Richard M. Jeanneret, the Americas vice chairman of transaction advisory services at Ernst & Young, said in an interview. “If you look around the corner so many times and don’t find anything there, you have to say: Hey, maybe there’s not anything nearby. Maybe it’s several streets over.”

The ingredients for a recovery are in place, deal makers say, with companies sitting on large piles of cash, stock prices high and interest rates still relatively low. That has led many to predict that the lackluster period is nearing its end.

But this is now the sixth straight year of declining deal volumes, Ernst & Young says in the report. In the United States, the number of deals in the first half of the year decreased 3 percent from a year earlier, the report said.

Still, the value of United States deals in the first half rose 29 percent, helped by a few large transactions, according to the report. (Worldwide, the value of deals was down, according to Thomson Reuters.)

Those big deals aside, companies are likely to play it safe, with “laser-focused” or “tuck-in” deals, Mr. Jeanneret said.

In a survey of corporate executives this year, Ernst & Young found that 76 percent expected the overall volume of mergers and acquisitions to improve, but only 29 percent expected to do a deal in the next 12 months. That suggests a “you go first” mindset, Mr. Jeanneret said.

And yet, deal makers are finding reasons to hope. Joseph Cosentino, a partner in the mergers and acquisitions practice at the law firm Clifford Chance, said that he is sensing an increase in deal appetite.

“I see a lot more assets being looked at,” he said. “I see people, when they’re kicking the tires, going further with it.”

But such increased interest may be coming in spite of the bleak outlook.

“I don’t know if there’s less uncertainty,” Mr. Cosentino said, “but at least more comfort with the uncertainty that there is.”