Viewpoint -- Sizzle To Fizzle: Taking Stock Of Global M&A

The urge to merge just isn't what it used to be. During the first four months of this year, global cross-border merger and acquisition (M&A) announcements totaled just $210 billion, down 40% from the same period a year ago. Over the same period, M&A completions plunged 61% from a year ago. After topping $1 trillion in 2000, announcements and completions are now running at an annualized pace of only $630 billion and $522 billion, respectively. That's another way of saying the great M&A boom has fizzled. The swoon reflects the fallout from weaker global growth, decimated corporate profits, and rising costs. In that transatlantic corporate marriages accounted the bulk of global M&A activity over the second half of the 1990s, economic weakness and slumping corporate profits in the U.S. and Europe have driven the decline in M&A activity. While net completed M&A flows between the U.S. and Europe still favor the former, flows nevertheless have rowed dramatically over the past year. Summing inward and outward completions shows a precipitous decline from $47 billion a year ago to just $15 billion in April of this year. Lower M&A flows from Europe means less overall M&A capital flowing to the U.S. So far this year, U.S. net inflows from the world have slumped to just $12 billion, down 63% the same period a year ago. More telling is the fact that in April, both U.S. announcements and completions showed net outflows for the first time in over a year, a result largely of weaker gross inflows. Although Europe still posted net outflows in the first four months of the year, there is no mistaking the fact that less capital is leaving Europe. Net European outflows to the world are down 29% year on year. We think this reflects a shift in corporate attitude among European multinationals, many of whom maintain a healthy appetite for U.S. assets, but nevertheless find themselves in a period of digestion capital rather than expansion following a half decade of aggressively penetrating the U.S. market. In addition, cyclical factors like excess capacity in the U.S. technology sector, weaker-than-expected U.S. corporate profits, and plunging share prices have militated against robust European outflows. Beyond the transatlantic, other notable M&A trends include a steep falloff in announced and completed flows to Latin America. Due in large part to a leveling off in privatization programs throughout the region, net announced flows to Latin America were down 70% in the first quarter of 2001 compared with the same period a year ago. Completions have declined at approximately the same rate. At this pace, net completions could fall to levels as low as $12 billion this year, less than one-fourth the level of net flows seen at the crest of the wave in 2000. Suffice it to say the M&A boom in Latin America has lost a great deal of vigor this year, a trend that should be watched closely by emerging market investors. In non-Japan Asia, net completions and announcements were at odds with each other in the first quarter of this year. Net completed inflows totaled $8 billion, while net announcements trended outward at $5 billion, reflecting in large part SingaporeTelecom's pending acquisition of Australia's Cable & Wireless Optus. In Japan, recent data underscore the nation's role as only a bit player in overall global M&A activity. Summing gross inflows and outflows, Japan saw $36 billion in flows in 2000. Since then, completions have risen to $56 billion this year (annualized), a record for Japan, but nominal compared with total global flows. Announcements -- one indication of future activity -- have slumped to just $13 billion at an annualized rate. In sum, this year's level of global M&A activity is much more subdued (and expected to remain subdued) relative to the last three years. At its core, the slowdown mirrors the cyclical weakness in the United States and Europe, the two principal regions of the global economy that drove the surge in M&A over most of the 1990s. As weak growth and slumping profits permeate both sides of the Atlantic, one consequence is cyclical weakness in the transatlantic level of cross-border M&A. We expect this to be a dominant theme over the course of this year. Elsewhere, the steep downturn in M&A activity in Latin America should be watched closely. And in Asia, cross-border M&A as a catalyst for corporate restructuring remains the exception rather than the rule. Joseph P. Quinlan is senior international economist and Andrea L. Prochniak is a junior analyst at Morgan Stanley Dean Witter & Co., New York.