Will an M&A Boom Lift Sagging Markets?
Anupreeta Das and Gina Chon of the WSJ report, Deals Stage a Comeback:
merger activity is sweeping to its highest levels since late 2009,
presenting a glimmer of economic confidence while the bond and stock
markets continue to price in a weakening U.S. economy.
On a day
of bleak jobless news and a 144-point drop in the Dow Jones Industrial
Average, Intel Corp. surprised investors by unveiling plans for a $7.7
billion all-cash takeover of Internet security company McAfee Inc. That
came just hours before First Niagara Financial Group Inc. in Buffalo
announced the biggest bank merger since the peak of the 2008 financial
crisis, a $1.5 billion acquisition of NewAlliance Bancshares Inc.
Both deals pale in size next to BHP Billiton's hostile $39 billion offer for Potash Corp. of Saskatchewan, disclosed Tuesday.
deal activity had been weak through most of 2010, as corporations
husbanded cash and waited for more signs of economic revival. Many of
the biggest deals have come in Asia, historically a laggard in the
This week's moves suggest some executives have grown
restless waiting for the broader economy to turn. Nearly $85 billion
of transactions have been announced since Monday, the highest weekly
sum since the week of Dec. 13, 2009, when Exxon Mobil Corp. announced
its $40 billion acquisition of XTO Energy Inc., according to Dealogic
One factor may be the cash
burning in their pockets. U.S. public companies carried $2.03 trillion
in cash and short-term investments at the end of the first quarter,
according to data from FactSet Research. That's about 57% above the
level at the same tome in 2006.
"I wouldn't say that CEO
confidence is a 10 for M&A; I would say it's more of a 7," said
Jeffrey Kaplan, global head of global mergers and acquisitions at Bank
of America Merrill Lynch. "This week's deals are about the ultimate
expression of confidence."
The weak overall economy is actually
helping one important aspect of deal making: financing. Interest rates
on investment-grade and junk bonds have continued to fall by the day. On
Thursday, yields for 10-year Treasury notes dropped below 2.6%,
helping push corporate borrowing rates to historic lows. Even companies
with weaker credit can attract funding at a level that makes deals
As the stock markets continue to tread water,
opportunism is also in the air. When Blackstone Group agreed to buy
power generator Dynegy for $550 million last week, Dynegy's stock
hovered at its all-time nadir.
Interestingly, BHP tendered a $40 billion all cash offer
to acquire Potash Corporation at $130-a-share, a 20% premium, and Intel
unveiled a $7.68 billion purchase of antivirus software maker McAfee
at $48-a-share offer, a hefty 60% premium.
Earlier this week, Stéfane Marion, Chief Economist & Strategist at the National Bank of Canada wrote a comment, Word: M&A activity levels remain depressed:
& acquisitions (M&A) activity has been unusually muted at this
point in the recovery. Uncertainty about financial markets and the
sustainability of the economic recovery has led companies to hoard cash
rather than spend. Sitting on a pile of cash when many central banks are
pledging to keep interest rates low for the foreseeable future does not
offer much of a return, particularly if the economy actually continues
to grow (albeit at a slower pace). Fortunately, the BHP bid for Potash
is a sign that the notion of “animal spirit” is still a concept that
needs to be reckoned with.
this mindset persists, we certainly have a catalyst to drive equity
markets higher. As today’s Hot Chart shows (click on chart above), the
total value of merger and acquisitions relative to the size of global
GDP remains well below its historical average of 3%.
But not everyone is convinced that an M&A boom is on the horizon or
that mergers benefit acquirers. Zachary Mider of Bloomberg reports, M&A Losers in $10 Trillion Deal Binge Led by McClatchy, Sprint:
than half of the 100 biggest takeovers made during the last
mergers-and-acquisitions boom have something in common: By one measure,
they never should have happened.
stocks of 53 companies that made the biggest purchases from 2005 to
2008 lagged behind industry peers two years later, according to data
compiled by Bloomberg’s ranking group. Among the worst performers were
McClatchy Co., Boston Scientific Corp., and Sprint Nextel Corp., all
three of which are now valued at less than the price they paid for
$10 trillion of deals during the last merger binge, even after more
than a decade of research showing deals often don’t pay off for the
buyers. The average stock price of all the top acquirers trailed
benchmark indexes by an average of about 3 percentage points.
“As a CEO, you are forced to think about growth, think about
outperforming others, building the biggest and most dominant
corporation in your sector, and you will do deals,” said Alexander
Roos, a partner at Boston Consulting Group.
“Everyone is always very
convinced of being the first to know how to do it right.”
Worse at Peak
Deals executed during a financial boom tend to turn out worse than
those done in a slump, according to research by Roos. Even so, a lack
of access to cash and credit can lead companies to shelve purchases at
the most opportune time. The global economic slowdown that began at the
end of 2007 coincided with a collapse in the M&A market, with
annual takeover volume falling by more than half from the peak, to $1.8
trillion last year.
“If you can get things
at low prices, you’re going to make money,” said Donna Hitscherich, a
senior lecturer in finance at Columbia University and a former M&A
banker. “But you have to have the courage of your convictions.”
Buffett had one of the top-performing deals in the Bloomberg ranking
after his Berkshire Hathaway Inc. bought PacifiCorp for $5.1 billion in
2006. Berkshire’s stock outperformed a benchmark index by 35
percentage points, making PacifiCorp the ninth-best deal in the
That doesn’t mean the
billionaire investor hasn’t had deals turn sour. In 2008, Buffett
applied the lyrics of a country music song by Bobby Bare to missteps in
M&A: “I’ve never gone to bed with an ugly woman, but I’ve sure
woke up with a few.”
SA, the best-performing acquirer in Bloomberg’s ranking, was boosted
when it also became a takeover target. Paris-based Suez purchased
shares in Belgium’s Electrabel SA that it didn’t already own for about
12.6 billion euros ($16.2 billion). Suez was itself later bought by Gaz
de France SA, helping the shares beat a benchmark index by 83
purchase of the Knight Ridder Inc. newspaper chain, for $4.1 billion in
2006, ranked the worst of the 100 on Bloomberg’s list, with McClatchy
shares underperforming the Bloomberg Advertising Age AdMarket 50 Index
by 93 percentage points. Sacramento, California-based McClatchy
borrowed cash to buy the chain as newspaper real-estate advertising
plunged. Elaine Lintecum, McClatchy’s treasurer, declined to comment.
Boston Scientific outbid Johnson & Johnson to buy Guidant
Corp. for $27.5 billion in 2006. The takeover diversified Boston
Scientific’s product line while leaving it to deal with tens of
thousands of safety recalls linked to Guidant defibrillators. The stock
traded 64 percentage points below the Standard & Poor’s 500 Health
Care Equipment Index two years after the purchase. Paul Donovan, a
spokesman for Boston Scientific, declined to comment.
Sprint’s $36 billion combination with Nextel in 2005 led hundreds
of thousands of customers to defect to competitors and pushed the stock
47 percentage points lower than industry peers. The company is now
valued at about $30 billion including debt.
Sprint has made “great strides” in the past 2 1/2 years in improving
its customer experience, strengthening its brand and generating cash,
said Scott Sloat, a spokesman for the Overland Park, Kansas-based
company, in an e-mail. The combination with Nextel also allowed Sprint
to bring the first fourth-generation mobile-broadband network to
customers, he said.
of buyers may be growing less tolerant. The biggest transaction
announced this year, Prudential Plc’s $35.5 billion offer for an Asian
insurance unit owned by American International Group Inc., fell apart
when Prudential’s investors refused to support it, calling the price
Among smaller purchases,
stockholders of Charles River Laboratories International Inc. last
month scuttled a planned $1.6 billion acquisition of WuXi PharmaTech
the past decade, large institutional investors have grown more willing
to speak out against an acquisition, a strategy the activist hedge
funds pioneered, said Christopher Young, head of takeover defense at
Credit Suisse Group AG.
“rambunctiousness,” Young said, has only grown since the depths of the
financial crisis in 2008. “Shareholders are saying capital is a scarce
asset, you should use it wisely.”
Despite these missteps, I see an M&A boom on the horizon. Cash rich
companies will look to grow through acquisition. What does this mean for
large pension funds? They should already be invested with Merger
Arbitrage hedge funds (beware of betas in merger arb funds), and more importantly, they should be overweight the top companies that are being acquired and underweight the top acquirers.
for the overall market, an M&A boom couldn't come at a better time.
Sagging markets need a lift, and big acquisitions will help bolster
confidence. Will it be enough to propel markets higher? If you couple
this with the Fed sponsored liquidity tsunami, it might spark things up
again, but if the economy keeps weakening, a lot of merger plans might
be placed on hold or permanently shelved.