Deals, including LBOs, may come back in 2013


The conventional wisdom early last year was that a pick-up in merger activity was just around the corner. The economy seemed poised to rise, companies had built up cash stockpiles and lending for deals seemed to be making a comeback.

The big surge never fully materialized, but optimism still reigns.

One indication comes from Morningstar, which makes the case for deal arbitrage as a strategy in 2013. The refrain is somewhat familiar: "We believe banks have an increased appetite for funding LBOs...the corporate bond market is open and active, making it easier to finance large-scale acquisitions, particularly as companies continue to stockpile cash. Higher market valuations have supported equity raises as well, so there is little question that capital is available for M&A, but CEOs continue to delay pulling the trigger." 

One area that seems ripe for more deals is LBOs. Banks have "repaired their balance sheets and need to expand net interest margins (which have been contracting). The high-yield market is wide open to new issuers and debt is cheap with all-in-yields near all time-lows. Additionally, private equity firms need to put money to work before capital commitment periods start to expire. With a strong market rally in the back half of 2012, we believe relative valuations have recovered enough that boards won't feel like they are selling too low, but still offer attractive internal rates of return to potential private equity sponsors."

So will 2013 be a year of numerous financial sponsor-driven deals? There will likely be more, but the mega deals, like the one Dell recently brokered, may remain scarce. The conditions aren't that good.

For more:
- here's the report
- here are the views of Steve Schwarzman