As the U.S. economy begins to emerge from recession, the mergers and acquisitions sector has found itself as one of the hardest-hit financial industries. Deal making dropped significantly in all financial service areas during the first quarter of 2002, with steep declines in insurance, specialty finance and bank mergers.
According to SNL Financial, a Charlottesville-based firm that provides financial industry data, no companies ventured into the billion dollar-plus acquisitions bracket. SNL further reported that only four deals valued at $200 million or more occurred first quarter - GE Capital Corp.'s acquisition of Comdisco Inc.'s electronics, laboratory and scientific leasing operations; Deutsche Bank AG's purchase of RoPro U.S. Holding Inc.; GE's attainment of Time Retail Finance Ltd.; and an undisclosed buyer's agreement to acquire Xerox Corp.'s Italian equipment-leasing operations.
With only 26 deal announcements and $3.3 billion in sold assets, volume for mergers and acquisitions among banks plummeted from numbers in years past. The recession also caused acquisitions in the securities and investment sector to plummet 72 percent from last year's numbers, having seen only $888.7 million in transactions. The insurance industry suffered a similar fate, declining 97 percent in value compared with the same period a year ago.
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Bjorn Turnquist, SNL director of financial services and insurance research, cited several reasons for the dramatic reduction in corporate acquisition, including general economic slowdown, tech firm dissolution and overall hesitance from investors to take on additional risks.
After the merger mania of the 1980s and mid-1990s, many firms had difficulty integrating the companies they had acquired, both in terms of consolidating personnel and establishing growth strategies.
"Investors, and as a result company executives, have been skittish about acquisitions over the past two years as a number of later-90s integration failures came to light," said James Record, SNL director of bank research, in a statement.
As companies continue to digest past deals, they are subsequently realizing they can grow their business through price increases and not costly acquisitions, Turnquist said.
And, of course, there is the perennial scapegoat of Enron, whose allegedly questionable business practices have led to increased market uncertainly, thus making investors hesitant about taking on risky stock purchases, Turnquist said.
However, SNL researchers said they were confident that the amount of deals would return to their normal levels after a few more quarters. The banking industry will be the most likely to rebound, as the dynamics of the sector haven't changed. With more than 8,000 independent banks nationwide, the market remains ripe for future consolidation, Record said.
The level of mergers and acquisitions "is not going to return to levels they were, but we operate in a cycle, so there will be hot streaks where companies will go on buying sprees," Turnquist said. "Levels will go back up, driven by the economy as we climb out of the basement and companies go through a few more profitable quarters. It won't be tomorrow, but it will happen again"
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