M&A Activity Expected to Gain Momentum This Year

NEW YORK -- With the economy improving, equity markets rallying and corporate America finding debt financing readily available, Rob Kindler, global head of mergers and acquisitions (M&A) at Morgan Stanley, is optimistic about the level of activity to be seen this year.

"There is no better predictor of overall M&A activity than equity markets," Kindler of Morgan Stanley’s New York offices, told The Financial Times. "It is pretty straightforward. If there is volatility, people don’t do deals and in down markets, people don’t do deals."

So far, so good: U.S. equities are up almost 8 percent since the beginning of December, helping the M&A world turn its back on a year in which, despite a 23 percent rise in dealmaking, the recovery in activity lacked momentum, according to the report.

Predicting that activity is set to rise again in 2011, Kindler noted that one aspect of a robust deals market was absent last year. "There were surprisingly few big deals in 2010," he said. "If those return, then 2011 could prove a bigger year still."

Kindler said what’s been happening in the last three to five years is that M&A is really driven by horizontal integration. "We’re not creating any more conglomerates. People are focused on their core businesses." Instead, he expects more large stock-based deals where companies within an industry get together and cut costs as they assess an ailing outlook for organic growth.

"Companies really need M&A as a strategic tool in a low-growth environment," he said. "But acquisitions are becoming harder, more competitive and therefore arguably more expensive to do."

Among the challenges is an increasingly independent-minded stance by shareholders. "Institutions aren’t just following proxy advisers’ recommendations anymore," said Kindler, referring to the U.S. businesses which, as well as opining on corporate governance, suggest how shareholders vote in deal situations. "They used to be determinant to the outcome. But institutions have recognized that they really need to make their own investment decisions."

Last year also demonstrated the perils of adopting a hostile tack where friendly entreaties fail. With hostile deals failed or ailing, such as Alimentation Couche-Tard’s aborted attempt to buy fellow convenience retailer Casey’s General Stores, companies could be more cautious than ever in taking an aggressive tack, according to Kindler.

"For the stars to be aligned for a hostile bid is very unusual," he said. "I don’t think there will be a big upswing in hostile activity this year."