M&A recovery picks up, but not at pre-2008 levels

The $28 billion takeover of ketchup king Heinz by Berkshire Hathaway and 3G Capital announced Thursday offered the latest sign that merger and acquisition activity is on the upswing.

But leading dealmakers say that the deal climate still has not recovered to pre-2008 levels.

"We're seeing some pretty good activity coming out of the fourth quarter" and into the beginning of 2013, said Henry Gosebruch, a managing director at J.P. Morgan.

"But there is still ways to go back to 2007 levels."

"It's improving slowly but steadily" said Marshall Sonenshine, chairman of the New York investment bank Sonenshine Partners. "It won't snap back, but it is improving."

The comments came as the Heinz deal surprised investors just minutes after American Airlines and US Airways unveiled their long-telegraphed merger to create the largest airline in the United States.

Together, the deals offer the latest sign that corporate players are gradually becoming more confident in economic conditions. Merger and acquisition activity jumped strongly in the fourth quarter of 2012.

The total spent on US mergers and acquisitions in the fourth quarter of 2012 reached $440 billion, up from $258 billion in the previous quarter and the highest level since the second quarter of 2007, according to data from J.P. Morgan.

Some of the more prominent deals that were announced during this period were Freeport-McMoran's $9 billion purchase of Plains Exploration & Production and McMoran Exploration, and InterContinental Exchange's $8.2 billion purchase of NYSE Euronext.

The jump in fourth-quarter mergers came amid greater confidence in the eurozone's prospects.

Another factor was a desire to complete deals before higher taxes on capital gains took effect in 2013, said experts in dealmaking.

After the fourth-quarter surge, global merger and acquisition activity in 2012 came in at $2.7 trillion, about level with the amounts spent in 2010 and 2011, according to J.P. Morgan data.

However, that was well below the 2007 level of $4.6 trillion.

Speakers at the New York iGlobal Forum conference on mergers and acquisitions this week said some dynamics in the business environment favor deal-making.

Companies are under pressure to increase earnings and to make good use of cash on their books amid a low-interest rate environment. Some larger companies want to divest non-core assets.

However, corporations remain cautious about deals in light of uncertainty about the US fiscal situation and the possibility of deep government spending cuts.

This uncertainty limits confidence and can make it more difficult to price assets.

Sonenshine said the bounce-back in mergers and acquisition activity was slower than in equity markets.

"M&A is among the last financial market categories to recover from the financial crisis because it requires particular conviction and clarity about macro economic dynamics, but it always recovers," Sonenshine said.

James Rosener, an attorney at Pepper Hamilton LLP who specializes in mergers and acquisitions, said a preponderance of deals falls in the middle market scale of $100-$500 million, or up to $1 billion.

Rosener cited one Indian conglomerate that wants to exit some businesses.

"They have too many businesses," Rosener said. "They have to focus on the ones that make a difference."