2011 saw considerable Mergers and Acquisitions (‘M&A’) activity in The Bahamas, with the sale of BTC to Cable & Wireless Communications plc, the Chinese investment into BahaMar, Buckeye Partners’ acquisition of BORCO and the listing of CBL’s shares on BISX. All of this activity was despite continued financial difficulties in Europe and the US. 2012 promises to be another interesting year once the dust settles from the General Election and key decision makers return from summer vacations. The APD Initial Public Offering, continued investment into infrastructure around The Bahamas, activity in the private banking and trust sectors and proposed investments in Grand Bahama are but some of the drivers behind M&A levels that we are likely to see as the year progresses. On a slightly longer term basis, I believe we will see this trend continue, with M&A activity levels reaching levels similar to more ‘mature’ markets such as Australia or even the US and UK.
Interestingly, the M&A activity that we are experiencing here in The Bahamas is against a backdrop of what can be described as ‘subdued’ at best, global M&A levels. Apart from a couple of very large transactions (Glencore’s proposed merger with Xstrata being the most notable), there appears to be little interest in transactions amongst the larger corporate players. Doubts over the future of the Euro, high sovereign debt levels and strikes across Europe seem to repeatedly dominate the headlines in Europe and, understandably, negatively impact global confidence levels and the market’s appetite for M&A. It shouldn’t be a surprise to readers of this article that M&A activity (in terms of transactions completed) has been negligible in recent times. Management teams over the last twelve months (and longer) have been focused on driving efficiencies in their operations and strengthening their balance sheets as opposed to targeting growth through acquisitions. Lending banks have taken a similar approach with a number of banks having to redirect resources towards the struggling loans in their portfolios away from their business development functions.
Such actions, and the macroeconomic uncertainties seen in global markets, naturally have had a significant impact on general market confidence. KPMG’s February 2012’s M&A Predictor actually found market confidence was down 14% from December 2010 levels, with India and Germany showing quite dramatic declines of 19% and 18% respectively over the last six months alone, thus indicating that any turnaround in activity levels is unlikely any time soon. Markets such as the US, however, are showing more positive signs.
A recent survey of 825 key decision makers across the US (large corporations, private equity (‘PE’) firms and investment funds) found that executives had “guarded” optimism about M&A for 2012. Conversely, this optimism was despite two thirds of those surveyed forecasting that the economic recovery wouldn’t arrive until the end of 2013 at the earliest. The main drivers for this increased optimism (from 2011) levels were: (i) the high cash balances held by corporations in the US; (ii) low interest rates; (iii) a likely surge in PE activity as firms try to complete their investment mandates; and (iv) a likely consolidation in financial services firms in response to the Dodd Frank financial regulations and the repayment of the Troubled Asset Relief Program (TARP). All of these drivers should act as a stimulus for M&A activity over the coming months and lead to an increased level compared to 2011.
Despite these positive drivers, it is likely that global M&A activity will still be hindered by the negative macroeconomic conditions seen in Europe, and elsewhere. These conditions along with the associated uncertainty that they generate, hinder the preparation of reliable financial forecasts, and any decision dependent on them. This difficulty was evidenced in the same US survey referred to above, where 46% of the respondents stated that it is more challenging to make accurate financial forecasts today as compared to any time in the last ten years, with some 32% stating that it was significantly more difficult. This lack of reliable forecasts not only affects potential purchasers in their acquisition decisions, it also impacts the lending banks involved in transactions as it prevents them from being able to properly value the opportunity at hand or price the downside risk attached to it.
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Author:
Nigel Rouse, Director, KPMG Advisory Caribbean Ltd
M&A Outlook