Global mergers, acquisitions to rise 15% in 2010: UBS

Any such pick-up would be welcome for shareholders — UBS said investors have historically received bid premiums of 30 to 40 percent — and for banks and law firms, who can reap big fees for helping structure deals.

Global M&A has plunged 40 percent in the year to Oct. 29, according to Thomson Reuters data, with US$1.55 trillion of deals announced. In 2007, the peak of the last merger boom, full-year M&A topped US$4.28 trillion.

UBS strategists, led by Jeffrey Palma and Daniel Stillit, said many companies were generating significant cash flow, while sluggish economic growth meant companies would often have to buy growth rather than expand organically.

“The biggest driver of an increase in activity is likely to be the increase in risk appetite in equity markets and in the boardroom, a return to earnings growth and profitability by World Inc and a backlog of pending asset disposals,” they wrote in a note on Monday.

“Credit conditions are also supportive and we expect private equity and bank lending to pick up at some point next year.”

Mergers have been stymied this year as the credit crisis made financing hard to obtain and future business performance tricky to forecast, and sidelined the private equity firms that accounted for a large slice of activity in the boom years.

But some recent deals driven by strategic motives, such as Kraft's informal 10 billion pound (US$16.4 billion) offer to buy British chocolate-maker Cadbury, have sparked optimism that the trough may be past.

Solid balance sheets made healthcare and tech-sector dealmaking likely, while the prospect of tougher regulation was likely to spur M&A among banks, as well as pharmaceutical companies, UBS said.

UBS forecasts world gross domestic product (GDP) will grow just 3.6 percent in 2010 and 3.7 percent the year after.

Last week Societe Generale said the conditions were in place for a “strong M&A cycle” driven by cash-rich companies in search of productivity gains, with large risk premiums versus government bonds suggesting equities remain “very cheap.”

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