Global mergers and acquisitions (M&A) plunged by more than half in the second quarter to $402 billion, but the green shoots of economic recovery may soon kick-start fee revenue from an eleven-year low.
Announced M&A had its slowest second quarter in six years, according to Thomson Reuters data released on Friday.
That was despite the $58 billion iron ore joint venture between mining giants BHP Billiton (BHP.AX) and Rio Tinto that made up around a seventh of all deals.
But rallying markets and brighter economic outlook of the last few months have allowed companies to forecast earnings with more certainty, sparking hopes that activity would not fall any further, or could even start to rise again.
We have reached the trough of the current M&A cycle. Based on previous cycles, we can expect activity to remain weak for about 18 to 24 months, said Dieter Turowski, head of European M&A at Morgan Stanley.
Turowski's bank tops the global advisory league table for the year and has advised clients including Rio Tinto and DirecTV Group on some of the second quarter's largest deals.
The collapse in dealmaking is a far cry from the pre-crisis days of 2007, when huge bank loans powered boom-year cash takeovers after hotly contested auctions.
The economic crisis left buyers of assets in short supply, constrained by scarce debt and often harboring radically lower ideas than vendors of what a business is worth.
VALUE GAP CLOSES
The strength of the capital markets could help the M&A business to recovery more quickly than after previous troughs in 1991-1992 and 2001- 2002, Turowski said.
We have seen a couple of months of good financing markets and benign equity markets. If that is still the case come September, volumes could pick up more rapidly, he added.
Carlo Calabria, head of international M&A and financial sponsors at Bank of America Merrill Lynch, said the rebound in markets had closed some of the valuation gap between buyers and sellers.
Having said that, boards will continue to look at the fair value of their business when faced with opportunistic approaches, Calabria said.
Companies and the bankers that advise them have scrapped several auctions this year because of the disconnect between buyers and sellers.
Dutch utility Essent halted the sale of its waste management unit earlier this month, blaming low prices and other problems for the failure of an auction that had once aimed to raise around 1 billion euros.
Financial services companies, which accounted for 23 percent of all M&A transactions in the first half of the year, are not likely to dominate the business to the same degree in the second half as bank recapitalizations draws to a close.
There were only two financial transactions among the top ten deals, one the $13.3 billion spin-off of Barclays Global Investors (BARC.L) to U.S. fund manager BlackRock.
During the first quarter, the British Treasury's $22.3 billion bailout of Lloyds banking Group and the multi-tranche $47.8 billion rescue for Royal Bank of Scotland accounted for five of the top ten deals.
Activity will likely be more balanced across sectors in the second half of the year, said Turowski.
Healthcare will be more active, but with less mega-deals. Natural resources will continue to see significant activity, and other sectors such as industrials, telecoms and retail and consumer will probably see a pick-up in volumes.
The lack of deals was accompanied by a 66 percent quarter-on-quarter fall in fees, as the capital markets replaced M&A as the main driver of investment banking revenues.
Worldwide fees slumped to $3.04 billion, the lowest second quarter since 1998, according to estimates from Thomson Reuters and M&A consultancy Freeman & Co.
Much of the decline is because the financial crisis has pushed private equity to the periphery of the market. Financial sponsors, which accounted for a fifth of all deals three years ago, made up just 2.6 per cent of the market this year.