From: WSJ October 01, 2009:
By JEFFREY MCCRACKEN and DANA CIMILLUCA
Bankers and lawyers feared the third quarter would be a rough period for mergers and acquisitions. There was economic uncertainty, limited deal financing and little corporate confidence to make acquisitions.
They were right to worry.
But after a two-year decline in activity, a late spate of big-name mergers gave them hope that the deal-making drought was nearing an end.
The evidence isn't in the numbers. The dollar volume of deals world-wide fell 41% from last year's third quarter to $478.3 billion, while the 8,124 deals represented a 20% drop, according to data provider Dealogic. Compared with this year's second quarter, dollar volume slid 19% and the number of deals was off 6%.
The third quarter was the slowest period as measured by dollar value since the third quarter of 2004.
In the U.S., announced deal volume tumbled 61% to $103.9 billion from $270.2 billion a year earlier, according to Dealogic. The number of announced deals fell 30% to 1,594 deals from 2,282. It was the eighth consecutive quarter that the value of U.S. deals fell from a year-earlier period, and it was down 43% from the second quarter.In Europe, the trends mirrored the global trajectory, with the dollar volume of deals falling both year over year and quarter over quarter. There were $160 billion of acquisitions of European companies announced in the third quarter, down 17% from the second quarter and down 55% from a year earlier, according to Dealogic
The Asian-Pacific region was a relative bright spot. Excluding Japan, there were $105 billion of deals announced in the quarter, down 36% from the second quarter but up 30% from a year earlier. China's thirst for natural-resource assets kept bankers in Asia busy, on deals including Yanzhou Coal Mining Co.'s $2.76 billion deal for Australian coal miner Felix Resources Ltd.
In Japan, which Dealogic breaks out because the investment banks look at the country as if it were its own region, the dollar volume of deals was $43.4 billion, up from both the second quarter and the year-earlier period. Besides financial firms, consumer companies were among the most-active Japanese deal makers. Highlighting the trend, beverage company Suntory Holdings Ltd. agreed to pay $3.82 billion for Orangina Schweppes, the French soft-drink maker, while at the same time holding talks with Kirin Holdings Co. for a deal that would create a food and beverage giant with combined sales of $40 billion.
But unlike in recent quarters, deal makers seem more willing to declare that M&A activity is back. The standard banker line that "deals are in the pipeline" is becoming more common.
"I think we hit a bottom over the summer. Since about the third week of August, we noticed a pickup in activity," said Bruce Evans, head of M&A for the Americas at Deutsche Bank AG. "A lot is driven by companies having a view of the future....It is no longer just about fixing their balance sheets."
Kraft Foods Inc.'s proposal to acquire Cadbury PLC was the largest announced deal of the period, though Cadbury rejected the $16.66 billion bid and it is likely to be weeks before Kraft submits a formal offer. Other big deals included Abbott Laboratories' $7.05 billion purchase of a Belgian pharmaceutical business, Dell Inc.'s $3.88 billion acquisition of Perot Systems Corp. and Walt Disney Co.'s $3.92 billion deal to buy Marvel Entertainment Inc.
"With general sentiment improving, together with equity and financing markets, companies are pushing forward with deals they've been thinking about all year but were reluctant to proceed with until now," said Adrian Mee, head of European M&A at Nomura Holdings Inc. in London.
Such deals still were few and far between. Year to date, U.S. M&A volume is down 34% to $505.4 billion from $759.8 billion a year earlier.
One sector that has more than held its own is health care, which has accounted for 32% of U.S. deal volume this year, up from 16% a year earlier.
"Health care was resilient because it's not affected by the economy the way a retailer or an industrial company is," said Jeffrey Stute, co-head of North American M&A at J.P. Morgan Chase & Co. "In addition, most health-care deals were not driven by [debt financing]. So financing drying up was not as much of an issue."
Mr. Stute and other bankers said a true M&A comeback will take hold when companies in other segments, such as technology, oil and gas, and consumer products, jump into the fray.
"Every segment has some pent-up demand, especially in industrials and technology. Behind the scenes, we are seeing lots of work getting done across all sectors," said Paul Parker, head of global M&A at Barclays PLC's Barclays Capital. "As we see [gross domestic product] growth turn up, I can guarantee you will see M&A turn. Each sector will have a signature transaction and then others will respond."
Bankers in Europe also express optimism that the worst is over. Still, few predict an imminent return to the deal frenzy of before the financial crisis, and many cite the possibility that the incipient recovery could be dashed by a double-dip recession.
"I'm personally optimistic that the rebound is here to stay, but there is an acute awareness that a W-shaped recovery could be around the corner," said Carlo Calabria, head of International M&A and Financial Sponsors at Bank of America Merrill Lynch in London.
In recent weeks, a number of long-lingering European deals were announced, such as the €1.28 billion ($1.88 billion) sale of Sara Lee Corp.'s European personal-care business to Unilever, announced Sept. 25. Sara Lee put the business up for sale more than six months ago, an unusually long period for an auction. Likewise, Belgian conglomerate Solvay SA found a buyer for its pharmaceutical division six months after officially putting it up for sale, selling the division for €4.8 billion to Abbott.
Even if the M&A recovery endures, some bankers predict it will be more restrained than what followed the bursting of the technology and telecommunications bubble in 2000. Takeovers also may be more focused on cost savings than growth, a sign of conservatism among deal makers.
"If one assumes that consumer growth will be muted for the foreseeable future," said Wilhelm Schulz, the head of European M&A at Citigroup Inc., "there is an argument that future deal activity may be more focused on driving economies of scale in the core business."
In the rankings of global merger advisers, Goldman Sachs Group Inc. maintained a slight edge on Morgan Stanley. J.P. Morgan was third, followed by Citigroup and Bank of America Corp.'s Bank of America Merrill Lynch. In the U.S., the top spots were flipped, with Morgan Stanley in first, followed by Goldman and J.P. Morgan.