M&A Activity Expected to Jump 36% in 2011

M&A Activity Expected to Jump 36% in 2011
M&A Activity Expected to Jump 36% in 2011

Global mergers and acquisitions activity is expected to rocket upward 36% next year to $3.04 trillion, getting its strength from the financial and real estate industries, according to a report released Monday by Thomson Reuters and Freeman Consulting Services.

Such an increase in M&A activity hasn't been seen since the credit crisis brought markets to their knees a few years ago. Back in 2006, global M&A rose 32% to $3.63 trillion. And next year's buyers are expected to be a markedly different breed than the value shoppers of last year, said Jeff Nassof, an associate consultant with Freeman.

"We did the same survey last year and and the target [company's] valuations were a factor," Nassof says. "But in this year's survey, people aren't just looking for distressed companies and value deals. They're looking at M&A as part of their competitive strategy."

The real estate market is expected to see whopping 88% increase in M&A activity next year over this year, with the financial industry following close behind with an anticipated 75% increase.

For both the real estate and financial firms, gaining market share in existing markets and divesting non-core assets were among the top drivers listed for anticipated deal making next year. In addition, the financial industry also expects the buying and selling of undervalued assets to be an M&A activity driver next year, while the real estate industry is expected to be heavily involved in transformational deals.

Financial Reform Propels Firms to Divest

While real estate M&A is expected to post a dramatic increase next year, Nassof points out that it's coming off of a relatively small base. In part, that's a function of the larger M&A picture. Last year, a mere $2.23 trillion in M&A deals were completed, compared with the $4.28 trillion in M&A transacted in 2007.

"The overall 2010 levels are still pretty depressed. It's still nothing like the heydays in 2007," Nassof says. "In real estate, confidence in the economy was the top cited factor. Real estate managers are feeling better about the risk and growth out there."

As for the financial industry, businesses are, as usual, engaging in mergers and acquisition deals for competitive strategic reasons. But in addition, they're doing so to comply with government policy changes that call for certain types of institutions to distance themselves from riskier investments such as hedge funds and derivatives, says Nassof. The results of this spring's financial reform legislation are forcing institutions to divest themselves of certain assets.

Beyond those two industries, health care in particular is expected to see a 16% increase in M&A activity next year, largely due to the earthquake effect: One seismic deal is expected to create an aftershock of competition among the other industry players, which are expected to snap up other companies to remain in the game, says Nassof.

But one of the more surprising aspects of the report is that technology companies say with so few bidders expected to be on the prowl next year, valuations of buyouts will remain "reasonable." The definition of "reasonable" may be different in the tech sector, where HP (HPQ) engaged in a fierce four-week bidding war with Dell (DELL) over 3Par - resulting in a 244% premium paid.

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