Blast from the past

M&A: M&A bankers should prepare for a surge. If deal activity follows a similar pattern to previous cycles, 2011 ought to be a considerably better year.

The climb out of the doldrums has been slow. It took nearly 11 months for the 2010 deal tally to surpass the $2 trillion notched up over the course of 2009. Economic uncertainty left companies only tentatively deploying their stockpiles of cash. Private equity firms were similarly cautious, or deterred by demanding valuations, despite having $500 billion of dry powder. Blackstone's attempt at the industry's first post-crisis $10 billion buyout, of Fidelity National Information Services, unwound quickly in the spring. Not even whispers of another one emerged.

The big deals that did get announced looked painstaking to complete. Mooted cross-border takeovers of US biotech Genzyme by French pharmaceuticals giant Sanofi-Aventis and of British broadcaster BSkyB by lead shareholder News Corp are limping along. They could yet go the way of miner BHP Billiton's blocked offer for Canadian fertilizer giant Potash Corp and Prudential's failed attempt to build an Asian insurance powerhouse with a tilt at AIA.

There have been some juicy transactions, such as PepsiCo's agreed $5.4 billion bid for Russian drinks group Wimm-Bill-Dann. But these are notable for being the exception. More often bankers have been busy with smaller, or humdrum, deals, like Coca-Cola buying back its own bottling system. Still, the omens are favorable. In previous periods of depressed merger activity, there has been a clear bounce back by the end of the second year following the trough. For example, deal volume in 1991 was down 41 percent from its peak in 1989, according to Thomson Reuters data. By 1993, it was up by a third. Following two awful years in 2001 and 2002, when global mergers plummeted from $3.4 trillion to $1.2 trillion, there was a 56 per cent surge from trough levels in 2004.

In the current downturn, the 2009 nadir was a 52 per cent decline from the peak in 2007. If there is a rebound, and the pace of recovery relative to the pace of decline is roughly the same as in previous M&A cycles, then there should be about $2.7 trillion worth of acquisitions in 2011. That may feel like a bonanza given the current climate. Alas, it would only take deal activity back to the levels seen in 2005.