Has the Media & Telecom M&A market returned?

Last week H-P announced it would buy 3Com for $2.7B and Motorola announced it was seeking to sell off its TV and mobile phone networking gear division.  Has the Media & Telecom M&A market returned?  Not so fast!

Volatile stock markets, limited availability of credit, and the increased cost of borrowing have ground the global M&A market to a halt.  Through the first half of 2009 the number of global deals was down 47% according to recently published reports.  While many “experts” were predicting a pick-up in the second half of 2009, it certainly has not materialized. 

Companies are expanding the size and talent levels of their Corporate Development departments in anticipation of future deals; but CFO’s are still gun shy about pulling the trigger.  For larger companies, doing a transformative deal is almost out of the question.  Gone are the days when a CEO could call his investment banker and say, “I’m going to need $5 Billion next week.”  Smaller and medium sized companies are also hamstrung.  Their primary buyer over the past several years has been private equity.  However, the classic private equity deal is simply too expensive...the financing costs are too high and the credit terms and covenants are too onerous. 

Apprehension over valuations is also leaving many CFO’s unwilling to commit scarce capital.  It is difficult enough in the current environment to forecast cash flows 1-2 years out, let alone try and guess how to model the world in years 3-5.  No CFO wants to buy the next AOL on his or her watch.  This leaves most companies focusing on building their own cash reserves and fortifying their balance sheets.    

There will be some strategic acquires and companies with strong balance sheets that will start to make acquisitions in the next 12-months.  However these will be relatively safe/small deals.  I don’t see the M&A market reaching 2008 levels until 2011.  At that point there will be nearly $21B of debt issued from 2005 – 2007 that will need to be refinanced.  Just like a home owner with a “teaser mortgage,” a large portion of those highly leverage companies will realize that they are not able to afford the new cost of their debt.  This will release the pent-up demand of the corporate and private equity buyers.