Signs of an Upswing in Merger Activity

From NYT DealBook, Sept. 8, 2009:
Merger mania may not be quite in full swing, but the pace of deal-making is showing signs of coming back to life after nearly a year.
Kraft Foods‘ hostile bid for Cadbury on Monday was only the latest potential blockbuster deal in recent days. In the last week, several multibillion-dollar deals have been announced, including those involving prominent companies like Walt Disney and eBay, The New York Times’s Michael J. de la Merced writes.
Yet many of the bankers and lawyers who piece these mergers together, well versed in reading economic tea leaves for signs of an industry’s health, caution that for now, deal-making is likely to rise only in fits and starts.
“The clouds have broken a little bit, and there’s a little bit of sunshine,” Douglas L. Braunstein, the head of investment banking for JPMorgan Chase, told The Times. “But it’s too early to say the storm’s over.”
Deal activity remains far below the giddy heights of only a few years ago. About $1.32 trillion worth of deals have been announced this year through Monday, according to data from Thomson Reuters. That figure is down 37 percent from the same point last year and 56 percent from 2007. (It also includes deals that have yet to close.)
In fact, until last week, August shaped up to be the slowest month for deals since 1994, according to Thomson Reuters. Now, it is just the slowest month since last November.
Still, there was hope that Merger Monday — so called because of companies’ tendencies to announce deals at the beginning of the week — seemed to be back in full force last week. Its presence had largely disappeared since the onset of the financial crisis.
Since the beginning of the year, the conditions that foster deal-making activity have largely improved. The stock markets have rallied, helping to establish a perceived floor for share prices. The broad economic recovery has inspired confidence in corporate boards that the worst is over.
Many of the announced deals through Monday, including Kraft’s offer, Disney’s $4 billion purchase of Marvel Entertainment and eBay’s sale of a majority stake in its Skype unit, also involved different types of activity, from hostile bids to corporate mergers to private equity transactions.
“We see this as the beginning of the next upturn,” Roger C. Altman, the chairman of Evercore Partners, the boutique investment bank, told The Times. He added that in his view, upturns tended to last five to seven years, while downturns, like the one that began in the second half of 2007, last on average about two to three years.
And management teams have regained confidence in pursuing targets they have eyed for some time. That has even meant hostile bids, like PepsiCo’s pursuit of its two largest North American bottlers, which the company completed last month. For many buyers, Mr. Braunstein said, the fundamental question is not whether deal-making is possible, but this: should I be doing something in this environment?
“It was just a matter of time before buyers returned,” Boon Sim, Credit Suisse’s head of mergers and acquisitions for the Americas, told The Times. “The general thinking seems to be, if you do not do something now, prices will be higher 12 to 18 months from now. So why wait?”
Just as crucial for deal-making, banks have slowly become willing to open up their wallets to finance transactions for a broad range of companies, beyond blue-chip acquirers like Pfizer and Disney. Several merger advisers pointed to the acquisition of Skype and the sale of Procter & Gamble’s prescription drugs business to Warner Chilcott as signs that bankers and other financiers were willing to back riskier deals, involving borrowed money from companies with less-than-sterling credit ratings.
Bankers and lawyers agree that the financing markets will most likely never return to the frothy heights of the credit boom in 2007, which enabled private equity firms to borrow liberally and often outbid corporate rivals. The ensuing financial fallout has left many companies with debt they are hard-pressed to pay, forcing some to seek bankruptcy protection.
But even the troubled deals of yesterday have led to opportunities for companies and private equity firms, which are snatching up targets out of Chapter 11. The number of bankruptcy-related mergers and acquisitions has risen to 241 this year through August, a 65 percent increase over the same time in 2008, according to Thomson Reuters data.
For months, the lack of financing has hurt private equity firms’ stock-in-trade of buying companies. Even now, many of these firms have been forced to borrow less to strike their deals, cutting into their returns, according to Richard E. Climan, a partner at the law firm Dewey & LeBoeuf who worked on the Skype deal.
While merger activity has risen over the last 30 years, the path back to a healthier deal-making industry is likely to be a slow one over the next several months, advisers say. What lies in store is mostly expected to be more of what has transpired this year: opportunistic purchases by corporations with healthy credit ratings, stock values and cash.
“There will be more deals next year versus this year,” Mr. Sim, of Credit Suisse, told The Times. “But I don’t think the floodgates are going to open until the fundamentals improve materially.”
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