March 2010- As the stock market continues to recover from last year's lows, investors are still looking for the silver bullet that will jump-start buying. However, once calmer footing is restored to the still-struggling economy, investors are likely to jump back in. But, The Associated Press reported, "Investors are likely to stay cautious until they see actual job growth. High unemployment remains a stumbling block to sustained economic recovery."

That overall tentative feeling applies to the M&A market, as well. Nevertheless, according to "Forging Ahead: Fourth-quarter 2009 global metals industry mergers and acquisitions analysis," a report from PricewaterhouseCoopers, deal activity picked up during the fourth quarter.

According to PwC's Manufacturing Barometer, 65 percent of respondents intend to increase operational spending over the next 12 months. It pointed out that the top areas slated for an increase in spending are new product or service introductions (37 percent), research and development (37 percent), geographic expansion (27 percent), business acquisition (23 percent), facilities expansion (22 percent) and information technology (22 percent).

In a conference call, Bob McCutcheon, partner and U.S. metals industry leader for PricewaterhouseCoopers, said, "Not surprisingly, a lot of the activity we are beginning to see will correlate with the availability of credit and the economy in general. But values are still pretty low, and it's an indication in our minds that companies are not yet confident enough to begin to dive into large-scale acquisitions but are taking it on a more strategic basis, taking smaller-scale deals.

"We expect to see continuing upward trends and M&A activity as we see continuing economic growth, and we're on this path to recovery," McCutcheon said. "In terms of M&A activity and thinking about the trends and watching the business cycle, metals, more so than a number of other sectors, tend to be a leading indicator, and I think we will continue to see a correlation between economic recovery and the rebound of M&A activity in this space."

Increasing number of deals
"Forging Ahead" points out that "the pace of the number of deal announcements for metals targets continued to improve during the fourth quarter with 32 announced deals, 11 more than the third quarter. On an annualized basis, the number of deals announced during the fourth quarter exceeds the number announced during all of 2009 and falls only slightly short of the total announced in 2008."

However, average deal values and deal size declined during the fourth quarter. "The primary factors limiting the recovery in larger deals include credit constraints and a focus by acquirers on cash preservation and operational improvements. These limiting factors have begun to show signs of abatement and are likely to continue to recede over the next several quarters, which should shift deal activity toward larger transactions."

Globally, China will be an important driver. "If we look at per-capita consumption of steel, for instance, in China, it's coming close to, and continues to close in on, a per-capita basis with developed economies," McCutcheon said. "So if we think of the sheer number of people, in the developing countries, it is no surprise that China specifically will be the catalyst for much of the economic growth going forward. Even if their pace of growth is slower than we have experienced in previous years, it's still going to be one that we need to pay very close attention."

In addition, future acquisition strategies should take carbon constraints into account. "I think it's important to understand that companies are now beginning to really think proactively about how to prepare for a carbon-constrained environment and the need to truly assess the implications of carbon on investment decisions, including the risk profile that they may be acquiring when they're evaluating a potential target," McCutcheon noted.

PwC points out that financial investment increased during the fourth quarter, and "conditions are in place for a brighter deal market in 2010. Metals deal activity has tended to increase coincident with economic recoveries, and the credit environment continues to ameliorate with improvements in syndicated lending and corporate bond issuance. In addition, risk premiums have narrowed and equity markets are recovering, providing better currency for future deals. Based on the probability of a sustained, if modest, economic recovery in key regions, higher commodity prices and the capital market improvements, we are cautiously optimistic about the environment for metals deals in the new year." MM