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The Deal: M&A Activity Hits Four-Year Low

NEW YORK ( TheDeal) - The second quarter of 2013 was the worst for deal activity since 2009 as cheap financing and market volatility crippled interest in mergers and acquisitions.

With one day before the quarter ends, 1,978 deals were announced for the second quarter -- the lowest since the third quarter of 2009 when 1,771 deals were struck, according to Dealogic.
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Gregg Feinstein, head of the M&A group at Houlihan Lokey Inc., said moribund activity was partially due to the lure of leveraged recapitalizations as an alternate option. "The high-yield bond market has strangely become somewhat of a competitor to M&A, it means people can leverage up, take out the difference in a dividend and still own the company," he said.

The high-yield bond market -- a key avenue for corporate funding -- hit a record low of under 5% on May 8, according to Barclays U.S. Corporate High Yield Index. It remains at historically cheap levels despite rates rising about 1% since Federal Reserve Chairman Ben Bernanke spoke of a tapered end to the Fed's massive bond-buying program that has kept funding rates low.

Feinstein said the preference for recapitalization was also underscored by a lack of obvious buyers. "People compare M&A levels to '06-'07 but that was an anomaly, a bubble in many things financial, and you could literally sell any asset at a good price in that market," he said.

As a result, he suggested a major shift of focus at many large Wall Street banks from M&A dealmaking to high-yield issuance.

Feinstein said volatility across various markets continued to have a dampening effect on dealmaking, given CEOs disliked a backdrop where it was difficult to accurately forecast returns on potential investments.
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Other senior bankers have echoed this sentiment, with historical charts showing a correlation between periods of low volatility and higher M&A activity.

Despite the sharp drop in deal numbers, deal value for the second quarter at $194.9 billion is only the lowest since the first quarter of last year ($171 billion). Deal numbers are seen as a better indicator of the health of the M&A market given one large deal can skew the total value for a given period.
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