Term Sheet

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To heat up M&A, cool the stock market

April 22, 2013: 3:49 PM ET

Does the M&A market need a stock market slowdown?

FORTUNE -- To get a sense of merger and acquisition volume, one can usually look to public equity performance. And vice versa. Just take a look at the correlation since 1995:

Capture

Chart published by Western Reserve

Last quarter, however, was a very different story. While the S&P 500 soared by more than 10% between Q4 2012 and Q1 2013, the global M&A market fell by nearly 29%. It was as if the chicken and egg were no longer related.

Rich Jeanneret, Americas vice chair for Ernst & Young transaction advisory services, believes that the disconnect has its roots in the financial crisis.

"It's a confidence paradox," he explains. "People are feeling better about the economic recovery and growth prospects, but are more skittish when it comes to equity valuations and short-term market stability. It's kind of like if you went to the beach last week and there was a shark in the water. You're back today and the lifeguard insists the sharks are gone, but you still may not be trusting enough to do more than dip your toe in the water. The more severe the fright, the more skittish you are."

Jeanneret thinks that M&A might catch back up if the public equities markets remain stable for six or eight months, but also thinks that a bit of public valuation "retrenching" may also help. "A natural pullback may actually help things, just because it would make buyers more comfortable with valuations and reduce those concerns about short-term volatility."

Jeanneret adds that there is plenty of theoretical supply and demand. All it needs now is some common ground on which to meet.

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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