The M&A business started 2007 with a bang—and ended it with a crunch. The gumming up of the credit markets has left investment bankers facing a gloomy economic outlook, and the withdrawal from the dealmaking scene of private equity buyers, a major source of fees. But, they needn’t be crying into their cups.
Despite the credit crunch, 2007 held up pretty well.
Deal volumes beat last year’s record and hit $4.7 trillion (Rs185.18 trillion), according to data provider Dealogic. The end of the year saw corporate buyers, perhaps emboldened by the retreat of buyout shops, returning to the fray. If that continues, mining, energy and financials all offer plenty of room for consolidation. Expect strategic industrial deals, rather than financial abandon, to be the order of the year.
Mining should be a rich seam. BHP Billiton Ltd’s quasi-hostile approach to rival Rio Tinto Plc.—a deal that would create a $350 billion metals supermajor—should get rivals such as Companhia Vale Do Rio Doce and Anglo American Plc. thinking about consolidation of their own. Xstrata Plc. and Antofagasta Plc., though both protected by big shareholders, are the most likely targets. Steel makers too—particularly those in China and western Europe—will look for ways to absorb potential cost increases, through consolidation or buying mines of their own.
The energy sector is also ripe for a further round of dealmaking. Both upstream and downstream firms are enjoying rising prices, steep demand from emerging markets and barrels of cash. Downstream, Centrica Plc. will continue to look attractive, as one of the few players with an open share register. Energy distribution and infrastructure will also be one of the few areas where the debt spigots should remain open. Upstream, a mega-cap merger such as the much mooted BP Plc.-Royal Dutch Shell Plc. deal might well come back onto the agenda.
Meanwhile, upheaval in the financial sector will keep bankers busy for months to come. Initially, that will mean more capital-raising and stake sales. Banks reliant on wholesale funding may even become takeover candidates. Think Alliance & Leicester and Bradford & Bingley in the UK. At the bigger end, RBS’s audacious bid for ABN Amro broke the received wisdom that consortium deals and bank break-ups don’t work. UBS, which trades 20% below the sum of its parts, may be next.