Fundamentals Suggest Uptick in M&A Activity in 2012

A new study by Ernst & Young says that 36 percent of U.S. companies will “pull the trigger” on an acquisition this year.

“Strong fundamentals, led by an increased focus on growth, should generate an uptick in deal flow in 2012, according to Ernst & Young LLP’s Transaction Advisory Services. Factors like robust cash positions, strengthening balance sheets and improved credit markets, combined with a mounting pressure for growth in a low organic growth environment, will result in a sizable uptick in transactions over the next 12 months," says the accounting firm.

“Fortune 1,000 Companies continue to hold a tremendous amount of cash on their balance sheets and have over $2 trillion in cash,” Ernst & Young said in a statement discussing the findings, which also point to increasing interest in healthcare, power and utilities and technology—all of which have brought a strong focus on acquisitions back into the corporate boardroom.

There’s definitely increasing optimism for M&A activity on Wall Street, writes Evelyn Rusli for the New York Times.

During the first half of 2011, the dollar volume of announced mergers worldwide neared its highest levels since the financial crisis, she writes. But that momentum proved fragile as deal volume tumbled 19 percent, to about $1.1 trillion, in the second half of 2011, compared with the same period the year before.

“Now, with stock and credit markets steadier, deal makers are growing confident that 2012 will be better for business. Not only do they point to cheap financing and the large amounts of cash on corporate balance sheets, but they say that companies that have already cut costs may decide that they need to make acquisitions to drive growth in the face of a tepid economy,” the article states.

Steven Baronoff, chairman of global mergers and acquisitions at Bank of America/Merrill Lynch, says, “The dialogue has gotten back on track” and “if Europe doesn’t go off the rails, you’ll see a return to long-term positive factors.”

“We’re optimistic that the need and desire for growth will overcome the volatility headwinds, but that’s where the battle will be waged,” said James C. Woolery, JPMorgan Chase’s co-head of North American mergers and acquisitions.

Not only that, but there is pent-up demand among buyout shops. Rusli writes: "After a long stretch of tempered activity, many private equity firms are still feeling the pressure to deploy capital or engineer exits."