August's unseasonable burst of dealmaking -- the busiest in over a decade -- could herald a wider rebound in M&A for the remainder of the year as low interest rates, record cash piles and low stock-market values encourage chief executives to strike deals.
Previously deal-starved bankers and lawyers canceled holiday plans and worked through vacations in August, as companies had the gusto to launch hostile bids or fight over target companies.
Announced deals and offers during the typically slow month of August surged to $262 billion worldwide, according to Thomson Reuters data.
It is the highest value of deals and offers announced during an August since 1999 when the value reached $275 billion. Still, by number of deals, it ranks lower than last August.
The nascent mergers and acquisitions (M&A) rebound, already spanning various sectors and countries, could pick up further when the traditional busy period starts, after the U.S. Labor Day holiday and the United Kingdom's August bank holiday, bankers predict.
What you have seen in August, that took people by surprise, is that there are some CEOs that have the confidence to pull the trigger and embark on a hostile transaction, or jump an agreed transaction, said Chris Young, head of takeover defense at Credit Suisse
Young said the fact people are willing to throw their vacations out of the window and pull triggers on transactions was a bullish omen.
Deal flow so far this year totals $1.56 trillion, a 22.3 percent increase over the same time a year ago.
This month's tally includes BHP Billiton's
Private equity deals for the month totaled $20.7 billion, double the same month a year ago and the highest since 2007, propelled by Blackstone Group's
The summer is usually quiet in the city of London and on Wall Street, as bankers flee to summer retreats. But Scott Humphrey, head of U.S. M&A at BMO Capital Markets, said a dearth of deals since the credit crisis peaked had created pent-up demand for transactions.
The rush of activity is good news for bankers, whose bonuses typically depend on the fees they bill.
For the year so far, Goldman Sachs
Companies are sitting on vast amounts of cash. S&P 500 companies closed last quarter with $1.63 trillion in cash holdings, the highest for any quarter on record.
Young at Credit Suisse said at some point institutional shareholders will start telling firms they need to do something with that money -- either return it through dividends and buybacks, or buy growth via acquisitions.
Listed companies are also looking cheap. Based on multiples of predicted earnings, U.S. and European companies both trade at about a one-quarter discount to the average over the last decade, Thomson Reuters data shows. S&P 500 <.SPX> companies trade at about 12 times forward earnings, while MSCI Europe <.MSCIEU> stocks are at just 10.5 times.
The story is probably not that premiums or deal prices are high, but that the public markets are not properly valuing companies - i.e., they are undervaluing them, said Francis Aquila, partner at law firm Sullivan & Cromwell.
Brand name, blue-chip companies are emerging to take a first-mover advantage, to buy coveted targets before others can get them, and to get into the regulatory queue before anybody else, said Paul Parker, Head of Global M&A at Barclays Capital, who predicts a steady increase in M&A.
William Reindel, a partner at law firm Fried, Frank, Harris, Shriver & Jacobson LLP, said there had been a pause in M&A activity earlier this summer as people were concerned about the overall economy and Europe's sovereign debt crisis.
Confidence has been returning, however, he said.
In recent transactions, you've seen multiple bidders, multiple financing sources, the participation of many different banks, he said.
This upturn is unusual, in that M&A usually tracks rising stock markets and a rapidly growing economy -- whereas many economists are predicting continued slow growth in the United States, and some worry about a second recession or the emergence of deflation.
Some say deals are being driven by companies seeking to offset limited internal opportunities to expand. In a period of low or no growth (companies) need to in effect buy growth, said Aquila at Sullivan & Cromwell.
And waiting could prove riskier than pushing on with a deal. A lot of times the biggest risk is not doing anything at all -- such as sitting on cash in a deflationary environment, or waiting until the economy turns around and potentially having to pay double the price, Aquila added.
(Additional reporting by Quentin Webb in London; Editing by Bernard Orr)