Economic optimism is improving in the U.S.; however, there will not be big changes in US deal volume for the remainder of 2013, according to EY Transaction Advisory Services.

"There is a significant, on-going element of uncertainty, preventing the wave of M&A we hoped for and macroeconomic pressures including slow global growth, unresolved regulatory, fiscal and tax  issues, and high valuations driving down returns are slowing inorganic growth plans," said Richard Jeanneret, Americas vice chair, Transaction Advisory Services for the EY organization. "The stagnant U.S. deal volumes in the first half of 2013 have done little to reassure corporate executives hoping for a strong M&A rebound this year, but we are still seeing deals in certain industries and private equity firms are looking for opportunities."

The number of deals for the first half of 2013 in the US decreased just 3% to 3,845 deals from 3,949 deals in the same period in 2012.  There was a larger drop quarter over quarter as overall activity slipped 11% to 1,810 deals in Q2 2013 from 2,035 deals in Q1 2013 after a relatively strong start to the year. On a positive note, US deal value shot up 29% for the first half of the year to $416.3 billion in 2013 to date from $323.8 billion in the first half of 2012. Similarly to deal activity, value declined 14% from Q1 2013 at $223.3 billion to $193.1 billion in Q2 2013. This is due to a number of high-profile deals with hefty price tags announced in the US.

"The fact that we saw a few mega-deals in the first six months indicates that some companies are feeling more confident about the U.S. economy and are willing to make bolder moves, but we do not expect these mega-deals to spur an uptick in the number of deals as most were opportunistic transactions," said Jeanneret.

The fundamentals for deal-making are in place and confidence is improving with plenty of cash available and open credit markets. Fortune 1000 companies continue to hold a tremendous amount of cash on their balance sheets and have over $1.8 trillion in cash. According to EY's Capital Confidence Barometer; 58% think that global credit availability is improving. Forty-four percent of U.S. companies think the global economy is improving and 76% expect global M&A volumes to improve. However, only 29% of US companies expect to do a deal in the next 12 months which is consistent with prior years, suggesting that a large number of companies are unlikely to execute deals and US volumes will remain at current levels.

Fundamental Reset in M&A Volumes?

While the necessities for deal making – cash and credit – are strong and the pent up demand for deal making is robust we are in our sixth straight year of declining deal volumes.

Even as economies are recovering, the level of macroeconomic and geopolitical uncertainty is still very high and the structural issues underlying that uncertainty are significant and without a short term or substantive fix in sight. "One has to wonder given that we have had more than a half decade of persistently soft M&A activity if a fundamental reset in the M&A marketplace is occurring," says Jeanneret.

This would not be unprecedented from a historical perspective. Data for M&A activity goes back over a century and during that time frame there have been long lasting and steep declines in M&A activity.

"The level of macroeconomic and geopolitical overhang to the M&A market could stall a surge in M&A activity for the foreseeable future," added Jeanneret.

Private Equity Continues to Pursue Opportunities

The slow-growth global economy and dwindling appetite for corporate M&A have created a challenging and competitive marketplace, but PE firms continue to be an opportunistic investor utilizing readily available acquisition financing to acquire businesses and refinance portfolio companies. US PE acquisitions declined in the first half of the year, down 25% in volume to 386 PE acquisitions year-to-date in 2013 from 512 during the same period in 2012. However, the value of acquisitions skyrocketed 94% to $85.4 billion in deal value for the first half of 2013 from $44.1 billion in 2012 due to the return of multi-billion dollar buyouts. Aggregate exits are also down for the first half of the year to 123 in 2013 from 173 in 2012. PE-backed IPOs are down 31% year-to-date to 29 versus 42 in 2012; however the value is up 14% to $9.9 billion.

"The run-up in the stock market has had a significant impact on valuation expectations, challenging deal activity so far this year," said Jeffrey Bunder, Global Private Equity leader, Transaction Advisory Services for the EY organization. "There are reassuring signs; however, as funds are sitting on $350 billion of dry powder, the demand has held up for the sale of PE-backed businesses and the IPO market has been phenomenal from a private equity perspective."

Fundraising continues to improve in the US and year-to-date aggregate commitments have increased 38% to $96.8 billion in 2013 from $70.0 billion in 2012. According to EY's Private Equity Capital Confidence Barometer, 85% of PE firms think fundraising will be positive or stable over the next year. Geographic and sector based funds have been a focus of the large PE funds as they look to capitalize on expanding LP investment targets.

"Real estate, energy, consumer products and industrials have been the most active sectors for private equity. For the larger firms, a global strategy is increasingly important with an emphasis on the emerging or frontier markets.  PE firms are expanding their global strategies, and exploring newer emerging markets such as Colombia, Mexico, Chile, Peru, Africa, Malaysia, Thailand and Indonesia," added Bunder.

Key Sectors

While the total number of deals decreased globally and in the US for the first half of the year, there were a few sectors which saw growth in volume and value.

"Companies need to transform and grow in order to create shareholder value and adapt to the changing landscape within every industry. Sectors that are likely to see activity – even as overall volumes remain consistent – include healthcare, consumer products, financial services, energy, and technology, in the second half of the year," said Jeanneret.

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