Rainmakers are regaining their swagger. After two punishing years, when the financial crisis and global recession caused mergers and acquisitions activity to drop by half, deal making is on the rise again. Announced global M&A volume for 2010 totaled $2.49 trillion at the start of December, up 21 percent from a year earlier. Revenues also rose a healthy 21 percent over the same period, according to Dealogic.
Perhaps just as important, life has gotten more difficult for the securities trader, the rainmaker’s perennial rival for power and influence on Wall Street. The Dodd-Frank Wall Street Reform and Consumer Protection Act appears destined to curb the decadelong dominance of traders and push old-fashioned relationship banking to the forefront. In a world where short-term trading faces restraints through higher capital charges and the so-called Volcker rule on proprietary trading, veteran deal makers — who often spend years getting to know their corporate clients — should deliver a bigger share of investment banking profits.
Institutional Investor ’s Rainmakers of the Year certainly delivered in 2010. The top ten deals by fees, as estimated by investment consulting firm Freeman & Co., brought in a cool $839 million, with PepsiCo’s acquisition of two bottling units and Kraft Foods’ purchase of Cadbury accounting for a quarter of that total. Four of the ten deals were in technology, a sector that generated revenues of $1.3 billion — more than any other sector — in the first eleven months of 2010. Private equity players, which generated huge fees during the boom years only to swoon during the bust, made a comeback. TPG Capital’s $5.2 billion buyout of IMS Health with the Canada Pension Plan Investment Board ranks No. 6 on our list. Only three of the top ten transactions involved a company outside the U.S., but cross-border deals are growing in overall importance.
With economic recovery continuing, albeit at a modest pace in places, and with companies having amassed great financial firepower, most bankers are anticipating a strong rise in M&A activity in the coming 12 months. “Twenty-eleven is going to be an action-packed year,” says Paul Parker, global head of M&A at Barclays Capital. “Our anticipation is for deal volume to grow up to 15 percent, to reach a total of $3 trillion or more.” Stefan Selig, executive vice chairman of global corporate and investment banking at Bank of America Merrill Lynch, concurs: “With record levels of cash on corporations’ balance sheets and historically attractive debt markets with record-low interest rates, all of the catalysts to do deals are in place for a strengthening M&A market.”
Cross-border deals and transactions involving emerging markets will remain engines of growth. By the start of December, announced cross-border deal volume was $902 billion, up 66 percent from the same period a year earlier, and emerging-markets volume had grown 63 percent, to $808 billion. With the U.S. dollar expected by many to stay weak and developing economies hungry for resources and other assets, bankers say they will boost their presence in Asia, Latin America, the Middle East and Africa.
Private equity deals are also expected to continue to grow, although at a more sober pace. Although there are likely to be transactions as big as $10 billion, medium-size deals should predominate. “Seventy percent of private equity deals are in the middle-market space that we define as companies with ebitda of $50 million or less,” says Everett Schenk, CEO of BNP Paribas North America, referring to earnings before interest, taxes, depreciation and amortization. “We have never had a stronger deal flow at the bank, and we expect it to get stronger in 2011.”