Mixed bag for securities lending in M&A trends
06 February 2012 London
Image: Shutterstock
Global economic uncertainty and regulatory change will continue to impact M&A in the coming year, according to the latest trends insights by Clifford Chance. Despite the unsettled global picture, activity is continuing and, in some areas, the law firm expects to see significantly more confidence in doing deals as the year progresses.
“Once confidence returns, the fundamentals are certainly in place for M&A activity to increase significantly as we move through 2012 and into 2013,” said Matthew Layton, global head of Corporate at Clifford Chance. What that might mean for the securities lending market is in question however since one of the prime drivers are significant cash reserves on corporate balance sheets and liquidity in PE funds, which are likely to seek out good deals. If activity leans towards cash deals, opportunities for arbitrage might be limited.
David Lewis, SVP at SunGard Astec Analytics, said that corporations are indeed sitting with a lot of cash on their balance sheets which may be burning a hole in some pockets. He expects that a significant portion of M&A activity will be financed from cash rather than raising debt and as a result, growth may not result in an uptick in the securities lending market.
At the same time, energy, mining and utilities were the most active sectors in 2011, representing some $557.7 billion of the total $2.2 trillion in global M&A. And going into 2012, there is expected to be a continued fight to secure natural resources and energy assets, according to Clifford Chance.
The recent announcement of advanced merger talks between commodities group Glencore and miner Xstrata could be an indication of things to come. Commenting on the deal, Chris Searle, corporate finance partner at BDO, said that the merger is no real surprise given that Glencore already owns 34 per cent of Xstrata and Glencore's IPO last year has now given a public valuation for its shares that can be used in an all share merger. The combined entity will easily be the largest among rivals such as BHP Billiton, Rio Tinto or Anglo American.
According to Astec Analytics data, Glencore had some 105 million shares on loan shortly after the announcement, while short positions on Xstrata dropped about 20 per cent. “I would expect more on loan for Glencore over the next few weeks, but as an all share deal, it is going to be very interesting and potentially very profitable in the lending market,” Lewis notes.
Meanwhile, analysts are chiming in on whether this merger heralds more such transactions.
“Whether this merger triggers another round of consolidation in the industry remains to be seen, given anti-trust concerns around the world, but other companies may feel forced to merge just to keep up with this new giant,” said Chris Searle of BDO.
Global M&A snapshot
Last year, global M&A activity increased 2.5 per cent over 2010 and transactions totalled $2.2 trillion. While 2011 was the strongest worldwide performance since 2008, activity levels declined for each quarter during the year and a number of headline deals collapsed. The second half of 2011 saw a significant decline in M&A as the eurozone crisis reached a feverish pitch – M&A in Asia Pacific dropped 31.9 percent, European M&A declined 28.7 per cent and the US saw a 9.3 per cent drop quarter-on-quarter.
Cross border M&A remains a continuing trend – deals between individual countries represented 41.5 per cent of global M&A in 2011 and deals between regions are up 19.6 per cent over 2010.
The escalating eurozone crisis continues to remain a risk factor to M&A growth.
“The key issues are around liquidity and funding, as all businesses are potentially impacted by banks’ exposure to the continuing crisis. Where sovereign debt of Eurozone countries is downgraded, this has knock-on effects for domestic banks and ultimately for domestic organisations accessing finance or having to refinance. M&A activity is being affected as confidence decreases and the spectre of a double-dip recession in many developed nations increases,” notes Clifford Chance.
“The risk of a euro exit by one of more eurozone countries continues to be very low, but buyers and sellers need to be mindful of that possibility, as well as other emergency scenarios, in respect of current and future M&A transactions. Due diligence to assess and analyse key areas of risk where the target operates in a potentially affected Eurozone country is advisable,” the law firm adds.
“Once confidence returns, the fundamentals are certainly in place for M&A activity to increase significantly as we move through 2012 and into 2013,” said Matthew Layton, global head of Corporate at Clifford Chance. What that might mean for the securities lending market is in question however since one of the prime drivers are significant cash reserves on corporate balance sheets and liquidity in PE funds, which are likely to seek out good deals. If activity leans towards cash deals, opportunities for arbitrage might be limited.
David Lewis, SVP at SunGard Astec Analytics, said that corporations are indeed sitting with a lot of cash on their balance sheets which may be burning a hole in some pockets. He expects that a significant portion of M&A activity will be financed from cash rather than raising debt and as a result, growth may not result in an uptick in the securities lending market.
At the same time, energy, mining and utilities were the most active sectors in 2011, representing some $557.7 billion of the total $2.2 trillion in global M&A. And going into 2012, there is expected to be a continued fight to secure natural resources and energy assets, according to Clifford Chance.
The recent announcement of advanced merger talks between commodities group Glencore and miner Xstrata could be an indication of things to come. Commenting on the deal, Chris Searle, corporate finance partner at BDO, said that the merger is no real surprise given that Glencore already owns 34 per cent of Xstrata and Glencore's IPO last year has now given a public valuation for its shares that can be used in an all share merger. The combined entity will easily be the largest among rivals such as BHP Billiton, Rio Tinto or Anglo American.
According to Astec Analytics data, Glencore had some 105 million shares on loan shortly after the announcement, while short positions on Xstrata dropped about 20 per cent. “I would expect more on loan for Glencore over the next few weeks, but as an all share deal, it is going to be very interesting and potentially very profitable in the lending market,” Lewis notes.
Meanwhile, analysts are chiming in on whether this merger heralds more such transactions.
“Whether this merger triggers another round of consolidation in the industry remains to be seen, given anti-trust concerns around the world, but other companies may feel forced to merge just to keep up with this new giant,” said Chris Searle of BDO.
Global M&A snapshot
Last year, global M&A activity increased 2.5 per cent over 2010 and transactions totalled $2.2 trillion. While 2011 was the strongest worldwide performance since 2008, activity levels declined for each quarter during the year and a number of headline deals collapsed. The second half of 2011 saw a significant decline in M&A as the eurozone crisis reached a feverish pitch – M&A in Asia Pacific dropped 31.9 percent, European M&A declined 28.7 per cent and the US saw a 9.3 per cent drop quarter-on-quarter.
Cross border M&A remains a continuing trend – deals between individual countries represented 41.5 per cent of global M&A in 2011 and deals between regions are up 19.6 per cent over 2010.
The escalating eurozone crisis continues to remain a risk factor to M&A growth.
“The key issues are around liquidity and funding, as all businesses are potentially impacted by banks’ exposure to the continuing crisis. Where sovereign debt of Eurozone countries is downgraded, this has knock-on effects for domestic banks and ultimately for domestic organisations accessing finance or having to refinance. M&A activity is being affected as confidence decreases and the spectre of a double-dip recession in many developed nations increases,” notes Clifford Chance.
“The risk of a euro exit by one of more eurozone countries continues to be very low, but buyers and sellers need to be mindful of that possibility, as well as other emergency scenarios, in respect of current and future M&A transactions. Due diligence to assess and analyse key areas of risk where the target operates in a potentially affected Eurozone country is advisable,” the law firm adds.
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