Mergers and acquisitions (M&A) will continue to be a key enabler of attaining the strategic objectives of corporations and private equity firms across the globe in 2013. M&A includes mergers, acquisitions and divestitures; as well as joint ventures and alliances. Current recessionary economic conditions and commodity cost fluctuations have fueled a very competitive environment with increased pressure to sustain revenue growth and profit margins across many industries.
M&A is a key part of a financial executive's toolkit to achieve improved market positions, portfolio optimization and hopefully value creation for stakeholders. Among the most prominent impediments to achieving post acquisition value creation are the lack of strategic fit, overestimated synergies, poorly executed integration and overpaying for a target company.
The level of global M&A activity was sluggish in 2012 and may have reached a cyclical bottom in the third quarter (see Chart 1 on page 54). This reduced level of completed deals reflects the overall political and economic uncertainties that faced business decision makers in 2012.
With the United States presidential election settled, at least some of these uncertainties will begin to lift. According to a recent survey of investment bankers conducted by R.R. Donnelly and Mergermarket, M&A-related issues that may have adverse business interpretation under an Obama administration include the direction of long-term tax rates and a more stringent regulatory/anti-trust environment.
In the U.S., four more years of an Obama presidency will likely trigger some personal and corporate tax policy reforms. If the effective date of implementation of likely higher dividend and capital gains tax rates is deferred until 2014, it should be a catalyst for some privately held sellers. There had been some acceleration of M&A deal flow in the three prior years' fourth quarters due to threatened tax increases that did not materialize.
However, the likelihood of at least some tax increases appears higher now. Private equity firms may also be compelled to accelerate portfolio company exits given potential taxability on carried interest.
Expectations are that despite the split Republican/Democratic control of Congress, some compromises will be reached to avoid ramifications associated with the looming budgetary deficits. If the so called "fiscal cliff" was avoided, a continuation of the mild U.S. economic recovery will be conducive to business...