After six years of moribund merger and acquisition activity driven by the financial crisis, loss of confidence and collapsing values, the big deals trumpeted by investment banks in London and New York are back, at least for now - and no thanks to those firms themselves.
Global corporations have been sitting on historic cash hoards waiting for one of two things to happen: a god-given guarantee of success for any outlay of investment funds or rising investor frustration with corporations' sub-par operational performance. As any sentient human being might imagine, Option B came first.
There is no guarantee that this is a trend, though the herd instinct among senior executives and bankers suggests that once one has done it - and others have seen it done - they will not want to be left behind. But we can pretty much guarantee that this time it is most emphatically not different. The first movers are acquiring stable brands with growth potential. Even morally and financially questionable deals like Michael Dell's re-acquisition/privatization of his own company (for the second - or is it third time? - we're losing count)may stabilize and reinvigorate a once-notable franchise which could be turned around by someone with more imagination and executional chops than current management.
What will follow, inevitably, is overpayment, strategic miasma and, finally, collapse of those companies last to the trough whose desperation to demonstrate the vigor of their throbbing pulse leads them a deal and a dollar too far.
One of the singular aspects of the current spate is that intellectual capital is a driving force. The prices being paid for brands mirrors the wake-up caused by the Apple-Samsung spat. In an ironic reversal of fortune, manufacturing plants and cheap labor are fungible, but vivid IP is forever (or at least until the next cycle).
A final irony is that the institutions most likely to get caught up at the bottom of this food chain are the banks and investment firms whose avarice and weakened state make them vulnerable to the same forces they have unleashed on so many others. JL
Francesco Guerrera and Dennis Berman report in the Wall Street Journal:
A flurry of acquisitions announced within hours of each other Thursday, for everything from ketchup to airlines to drug wholesaling, suggests big-time deal-making is back after a nearly six-year absence from Wall Street.
The $40 billion-worth of deals struck Thursday brings the total value of M&A transactions announced since January to nearly $160 billion, the fastest start to a year since 2005, according to Dealogic. Mergers and acquisitions took a sharp tumble after the financial crisis, as economic uncertainty and paranoia on corporate boards kept deal-making on the sidelines. This year, though, has been different.
M&A volumes historically follow the lead of the stock market, and the 6.67% increase in the Standard & Poor's 500 Index this year suggests more are on the way.
"The dam is burst," said James B. Lee, the veteran deal maker who is vice chairman of J.P. Morgan Chase & Co. He is stitching together his own deal: the $24.4 billion takeover of Dell Inc. by its founder and a private-equity firm. "The forces were too powerful to hold back forever," Mr. Lee said.
In addition to the Heinz deal, the highlights of Thursday's bonanza were the $11 billion merger between AMR Corp. and US Airways Group; a reworked deal for beer giant Anheuser-Busch over the divestment of some brands to rival Constellation Brands Inc. worth $4.75 billion; and drug wholesaler Cardinal Health Inc.'s billion purchase of rival AssuraMed.
M&A bankers are renowned for their optimism, no matter the conditions. But Mr. Lee and others argue that the recent spate of large deals, which also include the $16 billion merger of cable companies Liberty Global Inc. and Virgin Media Inc., and the $18.1 billion to be spent by Comcast Corp. to buy General Electric Corp. GE +0.09%out of broadcaster NBCUniversal, are more than coincidental timing.
Their argument is this: Companies have largely exhausted the benefits of cutting costs and improving productivity since the recession. They are now looking elsewhere for the level of growth that keeps shareholders happy. Deals, economic theory goes, are one way.
Business productivity spiked in the aftermath of the recession, as companies cut workers and aggressively pared back costs. Between 2008 and 2009, for instance, productivity surged by 6%, according to data compiled by the St. Louis Fed.
The rate of productivity increases has slowed considerably since then and at the end of 2012 were less than 1% annually.
The new attitude might be summed up by publicly traded 1-800-FLOWERS.com. In a Feb. 12 conference call with analysts, chief financial officer William E. Shea described how the company's balance sheet had changed since 2008. Back then, he said, the company had about $130 million of debt. Today, the sum is around $20 million.
"We're not afraid of making acquisitions," Mr. Shea said. "But during this past period of time, that wasn't the right thing for us to do…We think we can get organic growth rates moving north of where they are today…And if we can find the right company and strike the right deal, we will do that."
One thing that has changed is an alignment of both credit and stock markets. In 2013, both are rallying at the same time, offering cheap credit to buyers and the prospect of acceptable prices to sellers.
Both the H.J. Heinz Co.'s acquisition and the Dell deal involve large debt packages from banks. Financial groups are again willing to bankroll deals of such size because bankers are confident they can quickly sell the debt to yield-hungry investors.
Loan investors like large deals, too, because they are easier to buy and sell on the secondary market. "To me, this is the sweet spot of the leveraged loan market," said Christine McConnell, who manages $11 billion of loan investments at Fidelity Investments.
Few expect a return to the swashbuckling transactions of the late 1990s or mid-2000s, when cheap money, lavish lending by banks and aggressive private equity groups led to some poor acquisition choices.
Since then, activist investors have gained greater sway inside board rooms, often enforcing a sharp discipline on company executives, especially those with a taste for creative deal-making.
The U.S. government also has stepped forward, stopping AT&T Inc.'s proposed acquisition of T-Mobile USA in 2011, and, just weeks ago, suing to stop Anheuser-Busch InBev NV's $20.1 billion deal to take control of Mexican brewer Grupo Modelo.
In the months ahead, two paths seem mostly likely for deal making. The first uses M&A as a bridge between U.S. and foreign markets, with capital flowing into U.S. companies rather than the reverse.
Japan's Softbank Corp. is spending about $33.4 billion to take over Sprint Nextel Corp. Chinese companies, for instance, spent more than $10 billion on 46 U.S.-bound deals in 2012. Investors should also expect more incoming deals via rapidly developing conglomerates in such places as Turkey, South Korea and Indonesia.
"The sources of capital are global and the fundamental nature of our business is cross-border," said Antonio Weiss, global head of investment banking at Lazard Ltd. "What is happening is a redeployment of capital that has been built up in one region into another."
The second path will be standard industry-rationalizing deals, which may have been contemplated for years but lacked market confidence to complete. Look especially for activity in energy, real estate and financial services.
Late last year, Avalonbay Communities Inc. spent $15.9 billion on a once-battered real-estate investment trust called Archstone-Smith.
And it seems only a matter of time until greater consolidation comes to Wall Street's own door, as now-stabilized banks find mergers a painful, if inevitable, next step after internal restructuring.
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