As business deals go hand-in-hand with overall economic stability, it’s not surprising that 2009 got off to a rocky start in terms of global mergers and acquisitions (M&A). Although some key transactions took place last year, most activity was confined to large firms and a notable portion involved government interventions. Announced deals included Roche Holding AG’s US$72-billion takeover of Genentech Inc, Exxon Mobil Corp’s (NYSE: XOM) US$41-billion acquisition of XTO Energy Inc and Berkshire Hathaway’s US$34-billion purchase of Burlington Northern Santa Fe Corp.

However, despite these high-profile transactions, the overall volume of deals in 2009 (whether in terms of number of transactions or dollar value) was weak compared with previous years. Dealogic LLC, a UK-based data analytics firm, estimated that M&A activity last year was US$2.3 trillion, down 22 per cent from US$2.94 trillion in 2008 and the lowest it has been in five years. 2010, on the other hand, has already begun to show signs of life with an improved economic growth outlook and liquidity _ and analysts are betting on a M&A rebound this year.

The global economy is forecast to expand 3.1 per cent in 2010, after declining 1.1 per cent last year. The United States economy returned to growth of 2.8 per cent in Q03 2009 after four consecutive quarters of contraction, while Eurozone countries grew 0.4 per cent. Emerging economies like those of China and India will continue to lead growth and are expected by the International Monetary Fund (IMF) to grow nine per cent and 6.4 per cent this year after expanding at an estimated 8.5 per cent and 5.4 per cent respectively in 2009. The estimated growth for this year suggests a significant improvement from 2009, and is expected to facilitate a higher level of M&A activity.

One of the major hurdles for M&A last year was volatility in the markets as well as the credit crunch which made companies value holding a greater portion of assets in cash, rather than riskier investments. Resultantly, these cash-rich companies will be better able to fund business deals as conditions become more favourable. Another major hurdle to companies interested in buying into others was accessing funds to finance these ventures. However, as credit markets have thawed substantially, businesses are now better able to get a hold of the capital needed to finance such transactions.

Furthermore, after a sluggish couple of quarters, M&A activity already began to increase in the final quarter of 2009. This rise in M&A liquidity was driven by a significant increase in valuations. In the peak of the recession, as the stock market plummeted with the Dow Jones Industrial Average (DJIA) falling as low as 6,469.95 points, many companies were significantly undervalued, and therefore unwilling to allow a takeover at such low prices. However, the DJIA has since rebounded, closing at 10,583.96 points on Monday showing that firm valuations are seeing an uptick and confidence has improved. Additionally, between September and December 2009, buyers on average paid US$145 million to acquire a US venture-backed company, marking the first time since 2000 in which the quarterly M&A valuation surpassed US$100 million according to Dow Jones VentureSource.

Buzz about deals in the making has also been up during the past few months. One such example is that of Kraft Foods, Inc (NYSE: KFT) which has been negotiating to buy British confectioner, Cadbury PLC since September 2009. In fact, after several failed attempts, it was reported on Monday that KFT would sweeten its offer to Cadbury PLC (NYSE: CBY), offering shareholders a greater proportion of cash in its US$16 billion offer. Just yesterday, the company sold its North American pizza business for US$3.7 billion to help fund the possible acquisition as it faces competing bids from The Hershey Co and Ferrero SpA.

On the local front, 2009 was also a lacklustre year with reports of M&As few and far between. In fact, the only major deal that took place during the year was Seprod Ltd’s (SEP) purchase of the majority of the assets of the St Thomas Sugar Company Ltd. However, though Jamaican businesses were not making acquisitions, there were some notable divestments during the year. One such case is that of GraceKennedy Ltd (GK), which sold its holdings in Fidelity Motors Ltd as well as Versair In-flite Services (2006) Ltd to focus on its core business. Jamaica Producers Group Ltd also offloaded its loss-making Serious Foods business to focus on its key products.

After a year of ups and downs, the global economy has become less volatile. As factors like growth, liquidity and confidence continue to move in a favourable direction, M&As will be set to recover from the 2009 slump.

Shari DaCosta is a Research Analyst at Stocks & Securities Ltd. You can contact her at sdacosta@sslinvest.com.