Critiquing NYT Dealbook's Q1 Take on the M&A Market

We are big fans of Dealbook, The New York Times investment and transaction-focused reporting team.  But we thought their recent piece on M&A activity in Q1: Mergers Slowed to Snail's Pace in Q1; Lowest Since '03 missed the forest for the redwoods.

The article expressed disappointment that a combination of improved economic conditions, stock market advances and banker/lawyer predictions had not driven higher volumes.

Sometimes large cap biases miss broader market dynamics.  Economists analyze M&A as a form of corporate investment, and look at M&A dollar volume of deals as a percentage of GDP.  Granted that $10B deals create massive direct and derivative economic impacts, but most CEOs and owners are focused on opportunities under $100MM.

Source: NYTimes

From a different perspective, looking at number of quarterly deals involving US non-financial targets between 2003-2013, the momentum over the past few years is clear.  And in 2011-2012 deal flow involving US targets averaged 2,000 deals/quarter, varying 5-10%.  December was clearly a big month, driven amongst other things by tax-related timing.

Source:  Benning Associates LLC, Dealogic; excludes Finance and Real Estate

In the graph above upticks are frequently followed by pauses.  In our opinion, that is a key take-away from Q1 activity: Q4/12's boom stole Q1/13's thunder.  We would also point out two other considerations:  First, that corporate earnngs are better, but not great -- just 10 companies in the S&P500 were 90% of the earnings growth.  CEOs are very concerned about acquisitions being immediately accretive.  Similarly, many sellers that we work with are forecasting meaningful earnings improvement in 2013, suggesting that exits in the second half of the year will increase, as those budgets bear themselves out one way or another.