For M&A, a Much-Deserved Holiday

Investment bankers and corporate lawyers seemed to take a break on Wednesday — and they certainly earned it. About $3.1 trillion worth of transactions have been announced this year, including about $50 billion on Monday alone. That was when Blackstone offered $20 billion (excluding debt) for Equity Office Properties and Freeport-McMoRan agreed to pay $25 billion for Phelps-Dodge.
On Wednesday, both BusinessWeek and Fortune magazine took a look at why there is such a deal-making frenzy.
They covered some familiar territory (bulging private equity funds in search of takeover targets, easy access to the debt markets), but BusinessWeek hinted at a tantalizing, if a bit far-fetched, political angle. It cited the incoming Democratic congress as one big reason for the year-end spate of deals. In the new year, “deals may see a greater degree of scrutiny in Washington,” it concludes.
Meanwhile, the tone of the media’s merger-related coverage seems to grow more portentous every day. “If the good times keep rolling,” Fortune writes, the buyers will “do fine.” But “if the normal cycle reasserts itself, if the world hasn’t really changed, the buyers will end up with a wicked hangover.”
Because private equity buyers tend to offer cash, as opposed to the stock that strategic buyers tend to offer, sellers are more willing to deal. But that shows that the sellers “apparently would rather cash out than bank their future on the success of an expensive merger,” the article continued.
On Tuesday, The New York Times noted how the deal-financing scene has gone topsy-turvy, thanks to free and easy debt markets. It is so cheap to borrow that buyers essentially cannot help themselves, and debt financing is often seen as safer than using stock. While “normally cautious bond investors are living like Las Vegas high rollers,” the article noted, “stock speculators are behaving like worry-warts.”
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