Contrary to Earlier Predictions, M&A “Mega-Deals” Are Back!

Despite all of the experts’ predictions, large mergers and acquisitions are kicking 2013 off with a bang. On January 3rd, we posted a blog on the 2013 M&A Deal Outlook which we are pleased to see has already been proven wrong. Why pleased? The dramatic uptick in transaction value and volume is a reflection of increased confidence in the market, and an indication that our economy is returning to normal.

With increased confidence, executives are ready again to make “bold moves.”

photo credit: titocosta

Our earlier post, which cited data from Dealogic, Thomson Reuters, PricewaterhouseCoopers, and Ernst & Young, summarized the 2013 deal outlook as follows:

“Sources indicate they expect deals to remain smaller, strategic, middle-market, with a continued trend towards carve-outs, spin-offs, and divestitures as companies clean house and optimize their performance.”

In other words, the predictions for 2013 were the exact opposite of mega-deals.

Citing uncertainty around economic conditions including the fiscal cliff and presidential election, the consensus just a couple of months ago was that executives were feeling cautious and taking a “wait-and-see” approach, which was reflected in a significant drop in domestic deal volume and value in November 2012 and January 2013 (based on numbers from Zephyr data, published by BvD, pg 2). That same data also indicates an uptick in deal volume and value for the month of December 2012, which can be attributed to players wanting to “lock in” 2012 tax rates for deals ahead of potential increases related to the Presidential election and the fiscal cliff.

At the end of 2012, deal confidence was down from earlier in the year.

Making this turn-around all the more dramatic, by some reports, interest in M&A was actually down in the second half of 2012 compared to just six month earlier. According to Ernst & Young LLP’s US Capital Confidence Barometer (picked up by Marketwatch), only 23% of companies “report plans to execute an acquisition in the next year,” which they say is down from 34% just 6 months earlier.

The return of the mega-deal: American Airlines & U.S. Airways. Heinz. Dell.

Enter 2013, The New York Times Dealbook published an article yesterday opening with the sentence: “The mega-merger is back.” The exact opposite of what was predicted just weeks prior.

Writers are wisely tempering this good news with a measure of caution, saying its too early yet to declare a boom on par with earlier M&A crazes in 1989, 1999, and 2007 (source: NYTimes Dealbook). However, already domestic M&A activity is more than double what it was this time last year in terms of deal value ($158.7 billion, according to Thomson Reuters data cited by NYTimes Dealbook). Dealogic pegs it at $219 billion, saying “US firms are on pace to have the biggest year in M&A activity since 2000” (source: Time.com).

The deal uptick should be considered a good sign for everyone, given that (as pointed out in Time.com) “management won’t seek out – and boards won’t sanction – expensive acquisitions if they’re not confident about future growth.”

As with 2012, interest rates are near record lows, and companies and private equity are sitting on mountains of cash. What’s changed in the past few weeks to make deal conditions even more favorable: the stock market is on the upswing, the fiscal cliff crisis has been averted, European markets have stabilized, and the President is presently more focused on gun control than tax reform.

If we have to be wrong, this is something we can say we are happy to have been wrong about.

Has your organization had M&A, restructuring, or reorganizational activity in the past few years (or do you plan to)?

Take advantage of ETS’ expert review of current or historical (going back three years within statute) M&A activity in order to maximize savings and minimize compliance. Its a no-obligation opportunity to ensure all your t’s are crossed and i’s are dotted. If we see any red flags, we’ll let you know, and if we don’t, you’ll be able to rest easier with the additional reassurance that you’re doing things right.

Past activity:

Current activity:

Additional recommended reading if you are acquiring an entity or part of an entity out of bankruptcy: Employment Tax: Finding the “Bank” in Bankruptcy

 

References:

Farrell, Maureen. CNNMoney.com, “M&A making a comeback.” February 14, 2013.

Lattman, Peter. NYTimes.com Dealbook, “Confidence on Upswing, Mergers Make Comeback.” February 14, 2013.

Matthews, Christopher. Time.com, “Mergers and Acquisitions Boom! Is This a Good Sign for the Economy?” February 15, 2013.

Telegram.com, “Mergers give 2013 a dealin’ feelin’.” February 15, 2013.

Zephyr Monthly M&A Report published by BvD, North America, January 2013.

Disclaimer: This article is general in nature and is not intended to replace the guidance of an employment tax expert and/or legal professional with regards to an appropriate course of action in your particular circumstances. Please consult with a professional for appropriate advice in your case. Pursuant to IRS “Circular 230” rules, any information included herewithin is not intended or written to be used for the purpose of avoiding penalties under the federal Internal Revenue Code.