Frenzy of Deals, Once Expected, Seems to Fizzle

It was mere months ago when headlines were blaring news of the return of merger mania.

Deals were back! Confidence had returned! Warren Buffett was buying Heinz! Dell was going private! American Airlines was merging with US Airways!

Well, take a look around. Prognostications of a return to deal-making have turned out to be wrong, very wrong.

So wrong, in fact, that merger activity, measured by dollar value, looks as if it is on track to be down 3.4 percent globally from last year, according to Thomson Reuters. By number of deals, it’s the lowest year-to-date period since 2005.

And deal-making may not be coming back anytime soon.

“It’s pretty grim, even with Verizon-Vodafone padding the numbers,” said Scott A. Barshay, the head of the corporate department at the law firm Cravath, Swaine & Moore, referring to Verizon’s recent $130 billion deal to buy out Vodafone’s share of the joint venture in Verizon Wireless. If you exclude that deal from the count measured by total dollars, we’ve returned to 2009.

“There has not been confidence in the strength of the recovery since the financial crisis, which makes C.E.O.’s and boards reticent to pursue major transactions,” he said.

Some blame the debt ceiling fights in Washington, the government shutdown or the introduction of Obamacare for creating uncertainty in the economy and thus the slowdown in deal-making.

“It reflects the broad-based loss of confidence in the business community and their inability to make significant capital investment, be it M.&A. or capital spending, in large measure because of the uncertainty of tax and regulatory policy from Washington, D.C.,” said Doug Kass, founder of Seabreeze Partners Management. “Until Washington, D.C., grows more proactive, less inert in policy, this is likely to continue.”

But that may only be part of it.

What if the slowdown in merger activity isn’t cyclical, but secular? What if corporations have learned the lessons of so many companies before them that the odds of a successful merger are no better than 50-50 and probably less? Is it possible that the biggest deals have already been done?

Big deals are drawing significant antitrust and regulatory scrutiny. The United States government blocked AT&T’s acquisition of T-Mobile and is in the middle of trying to block American Airline’s merger with US Airways. Can you even imagine the outcry if a big bank merger were announced in this postcrisis world?

The stars were supposed to have been aligned for mergers and acquisitions â€" a barometer of confidence in the boardroom from the people who can actually see the health of their own business up close.

Corporations are sitting on record cash, some $1 trillion. The debt market is back open for business. Activism by large shareholders is pushing companies to rethink their structures. Economic and corporate growth are slowing.

And of the deals that have been announced, shareholders have rewarded acquirers by bidding their shares up. All of those ingredients had led many experts to suggest that companies would seek to buy rivals at a record pace.

“It feels like we have seen the beginning of the return of the strategic deal. We just need to see more of that across more sectors to call it a recovery,” said Gregg R. Lemkau, a co-head of global mergers and acquisitions at Goldman Sachs.

Predicting, of course, is a dangerous game. Now that I’ve speculated that deal flow will continue to be slow, fate may have it that a spate of big mergers will be announced in the coming weeks. But there would have to be an awful lot of deals before Christmas to make up for the slowness.

By deal value, it should be noted that deal volume in the United States is up 29 percent. But for Wall Street, the lower number of total deals is a meaningful problem. Most banks had been staffed in expectation of the return of merger advisory work, which is some of the most lucrative business a bank conducts. And while most bankers will say they are busy, and they are, many are working on answering shareholder activists, who typically prod companies to find ways to unlock corporate value.

There’s not nearly the same kind of payday in helping a company defend itself against an activist as there is in working on a deal. More often than not, helping a client defend itself against an activist is a relationship-building exercise, undertaken in hopes of getting hired for a transaction down the road. Goldman Sachs reported its third-quarter net revenue for advisory work was down 17 percent compared with the same period a year earlier.

Come bonus and management review season, some Wall Street banks may have to rethink their staffing needs.

However “grim” Mr. Barshay sees the current deal activity, however, he disagrees with the assertion that deal-making is on the wane for good.

“I do not believe the slowdown is secular. For the last 50 years, M.&A. activity has been cyclical, waxing and waning with confidence in the economy,” he said. “It isn’t that C.E.O.’s won’t do a deal, but they have to believe it will be a triple or a home run before they’ll pull the trigger. That’s why you’ve had this strange phenomenon in 2013 of fewer M.&A. deals.”

And while mergers may be a good barometer of boardroom confidence, Mr. Kass says it is a poor indicator of the economy and the market.

“Never lose sight that business leaders are much like retail investors,” he said. “They buy (invest and take over) high and sell low! As such, and based on history, they are very lagging indicators.”

Andrew Ross Sorkin is the editor at large of DealBook. Twitter: @andrewrsorkin