Tuesday, December 21, 2010

The Thin Gruel of Rising M&A Volume

Alessandro Pasetti, of Dow Jones Investment Banker, reports:
The banking industry remains in a regulatory flux and there is thin gruel for rainmakers contained within Dealogic’s preliminary end-of-year data out today. A sharp rebound in credit is necessary to spur M&A on a large scale. That still feels a long way off, and may never reach the pre-credit crunch heights.
The key Dealogic numbers are:
–Announced global M&A activity this year was nearly a fifth higher in dollar terms than last year, with emerging markets snatching a record-breaking third of the world-wide total and surpassing Europe for the first time.
–Cross-border transactions account for an increased proportion of the rally.
–North America, with $979.7 billion of deals, is ahead of all. Japan’s deal volume is down 36% year-on-year to $90 billion, the only country bucking the trend of an M&A pick-up across the globe.
–Energy led the industry ranking for the first time on record, having recorded its highest yearly volume ever. The figure is skewed by the $42.6 billion acquisition of Brazilian oil & gas assets by Petrobras, the largest deal of the year.
–Emerging-market volume reached $876.9 billion in 2010, up 56% from $561.2 billion in 2009. It accounted for 32% of global M&A, the highest share on record. The so-called BRIC nations (Brazil, Russia, India and China) accounted for 52% of emerging-market volume.
–Financial-sponsor buyouts totaled $183.8 billion in 2010, up 74% from $105.5 billion in 2009. Secondary buyouts reached $56.7 billion in 2010, the highest since 2007.
–Cross-border volume reached $969.2 billion via 9,573 deals, up 62% from $598.6 billion via 8,328 deals in 2009. Emerging markets accounted for 35% of total cross-border volume, at $336.3 billion.
Fortunes over the next year or two ride on whether banks will get the loan engine firing on all cylinders for clients across the rating spectrum. Of course, lending conditions by financial institutions have eased recently, but it certainly doesn’t feel as if a credit splurge is around the corner.
As growth stalls in western economies, M&A will struggle to record a significant rebound next year, with activity likely to be driven by defensive moves. Defensive, opportunistic, strategic. It doesn’t much matter to a banker what results in fees, though arguably a vigorous deal-making world needs all three to be kicking around.
Slivers of light are appearing. Blackstone Group gets in gear to launch a $15 billion buyout fund, Apax is following suit, so private equity may provide the necessary fillip on the back of opportunities among distressed assets.
Then there are the emerging markets.
The BRICs are providing bankers with trends and M&A activity likely to keep them busy in the medium term. Growth potential remains strong in the group but there are political risks bubbling up and surging competition for mandates. This suggests only the few with scale will emerge victorious–and the Chinese banks, with longer-term aspirations to be as powerful as Goldman Sachs Group, will complicate that.
To visit the Dow Jones Investment Banker Web site, click HERE.

Monday, December 20, 2010

Corporate Deal Makers Cautiously Return

December 20, 2010, 10:54 am — Updated: 12:51 pm -->
As the dark clouds of economic uncertainty lift, the environment for corporate deal-making is looking brighter.
With record cash on their balance sheets, United States companies are once again willing to invest in growth, according to McKinsey & Company’s quarterly report on economic conditions. The report, set to be released on Monday afternoon, found that a majority of executives are not postponing acquisitions or capital investment. And many are looking abroad, eager to capitalize on the fast-growing emerging economies and the rising influence of China, India and Brazil.
William Huyett, a director at McKinsey, said companies were cautiously optimistic, a positive sign for deal-making activity in 2011.
“First and foremost, there is confidence that the real markets are starting to grow again, unemployment is starting to drop and capital markets are starting to stabilize,” Mr. Huyett said. “Boards of directors are less skittish in pursuing transactions. We’re far from out of the woods, but the period of absolute uncertainty has passed.”
That said, McKinsey’s findings represent a more tempered view among executives compared with other recent reports. Thomson Reuters and Freeman Consulting Services recently predicted a 36 percent rise in global deal activity to $3 trillion in 2011. PricewaterhouseCoopers announced this month that “key conditions are in place for a resurgence in deal-making in 2011.”
McKinsey interviewed 2,076 executives in early December from a broad swath of industries. According to the results, 54 percent said they were not delaying or failing to pursue strategic deals, versus 25 percent who said they were holding back. And about 22 percent were undecided. The results, noted Mr. Huyett, were “remarkably consistent” across all sectors.
The availability of credit has also improved. Some 44 percent said their company had received financing in the last six months. Among those who said they were postponing deals, only 16 percent cited credit issues for their decision — an improvement from 30 percent in September.
Most executives said they were looking to the emerging markets for growth, particularly India, China and Brazil. More than 75 percent expect the three countries’ influence to grow over the next five years, while the clout of developed economies, like the United States, the European Union and Japan, will stagnate or recede. Unsurprisingly, the vast majority of companies that do play in emerging markets — some 72 percent — expect a greater share of revenue or profit from these regions in the coming years.
Mr. Huyett said he expected companies to take a more moderate approach to deal-making, especially amid the current volatility.
“It’s better to take a measured course and pursue M.&A. systematically, instead of a reflexive jump in the pool that companies may regret,” he said.

Friday, December 10, 2010

Why M.&A. May Rebound

After a long drought, companies and private equity firms may be ready to make deals again, oddly enough because of cash, debt and taxes.

Here are the main reasons why:

A consensus is emerging from several prominent dealmaking experts that mergers are coming back, largely because companies can now afford them. U.S. companies have a near-record $1.93 trillion of cash on hand, according to Federal Reserve data.

Low interest rates have spurred corporate borrowing and refinancing at unprecedented levels. Private equity firms, which are enthusiastic users of junk bonds, have driven junk volumes to an all-time record this year, according to new data from Thomson Financial.

Big borrowing is likely to continue. Analysts at investment bank Keefe Bruyette & Woods predicted that the Fed will keep interest rates low throughout 2011. That would keep the debt markets open for a long enough time for private equity, in particular, to refinance their companies’ crushing debt loads.

The potential of new stimulus in the form of tax cuts that will benefit companies and rich individuals. Congress is currently hammering those out.

But despite the increasingly ideal conditions, deal makers may have to prepare themselves for potential disappointment. For one, American corporations may still prove themselves unwilling to spend on acquisitions as long as the economy’s growth still looks tenuous.

That kind of caution has prevailed so far. Despite record cash levels, companies have bunkered down, presumably traumatized by the financial crisis and reluctant to deploy their cash for activities like hiring. It’s a big reason why the national unemployment rate has hovered about 10 percent for over 18 months even as corporate cash balances hit their highest levels in 50 years.But despite the increasingly ideal conditions, deal makers may have to prepare themselves for potential disappointment. For one, American corporations may still prove themselves unwilling to spend on acquisitions as long as the economy’s growth still looks tenuous.

Hope, however, springs eternal. PricewaterhouseCoopers, for instance, struck an optimistic note for 2011 in a report on Thursday, indicating that incipient merger activity this year is a leading indicator of … more mergers. PwC believes that companies are out of recovery mode and ready to make acquisitions again to grow.

PwC also said that private equity is returning to the fray. A veteran dealmaker, Kohlberg Kravis Roberts & Co. founder Henry Kravis, strongly agreed this week. Kravis showed some optimistic swagger in a speech at a Goldman Sachs financial services conference this week, in which he lauded private equity’s ability to pay more for companies as a sign that private equity is ready to drive deals again after a two-year hiatus.

The observations from Kravis and PwC’s report echo the same outlook from veteran investment banker Kenneth D. Moelis at a conference last week. Moelis believesthat M&A will recover, but slowly.

“These bubbles don’t get reblown quickly,” he said last week.

There is still a question, however, of whether companies will actually go out there and start buying.

One merger arbitrager said that companies are dying to make acquisitions again, but there is very little interest from shareholders in doing so.

And if and when investors become vocal about how companies deploy their excess money, the shareholders would have to support deals and strongly oppose low-return uses of the cash, like raising dividends or staging big stock buybacks.

But there is another option: companies might do acquisitions, but just spend very modestly. Small deals would allow companies to make acquisitions without digging to deeply into their treasure chests.

And, even if all this is enough to increase confidence to pull the trigger— and prices are right— cautionary tales loom large. There are still significant problems being worked out from the past dealmaking boom.

There are different views on whether those past merger and debt issues will be damning enough to put the brakes on new deals.

On the optimistic side is Tim Hartnett, who leads the U.S. private equity practice for PwC. He said this week that an anticipated high volume of distressed private equity deals never materialized because companies cut costs, cleaned up their balance sheets and “that Doomsday scenario never happened.”

Meanwhile, research from Moody’s Investors Service indicates the weak volume isn’t necessarily a reflection of responsible management. A Moody’s report this week suggested that some private equity firms may have saved their portfolio companies from bankruptcy through high-wire financial engineering: buying up their portfolio companies’ distressed debt and then paying creditors with other kinds of securities.

Private equity firms particularly favored a certain kind of debt with a risky feature called “payment in kind,” or PIK, toggles. PIK toggles are a feature that allow companies to pay back their debt with more debt. The companies that use PIK toggles are overwhelmingly backed by private equity firms. Of the 62 companies that Moody’s studied, the majority were backed by PE firms Apollo and TPG, who were active proponents of PIK toggles.

The companies that favored PIK toggles have also been defaulting at a higher rate than expected. Moody’s said that in 2009, nearly 30 percent of the companies that used PIK toggles during the boom went on to default – or nearly double the rate of ; Moody’s also found a close link between distressed exchanges, PIK toggles and default. A separate academic study last year found that 50 percent of companies that used distressed exchanges to save themselves from bankruptcy eventually went on to fail anyway.

The companies that suffered as a result of this kind of financial engineering are still stumbling through, but barely. Moody’s says companies like Clear Channel Communications, Harrah’s and other boom-time buyouts are now at high risk of defaulting on their PIK-toggled debt.

And those companies are owned by the same PE firms that are enthusiastic about a new round of deal-making.

The lesson: With problems from the past still lurking, it pays for deal makers to be cautious, even as M.&A. rebounds.

Tuesday, December 07, 2010

L.B.O.’s: Don’t Call It a Comeback

December 7, 2010, 10:02 am
The buyouts last month of the big consumer names J. Crew and Del Monte were two promising signs that private equity firms were ready to come out and play again.
But don’t call it a comeback.
Sure, on the surface, there seems to be a reasonable resurrection. The volume of global leveraged buyouts have more than quadrupled this year, according to Dealogic data. Private equity firms have spent $73.6 billion on 193 deals in 2010, compared with $16 billion for 76 buyouts over the same period in 2009, noted Dealogic.
But dig deeper into the financing, and the story looks grimmer.
The private equity business runs on debt — mainly the leveraged loans and junk bonds it takes out to buy companies. As DealBook has noted, there has been a boom in such debt this year, with new records set for issuance.
That is not necessarily a good sign. Rather than funding new deals, most of the financing activity has helped private equity firms sustain their current investments, which would be in deep trouble without the help. It’s a survival play, as their portfolio companies are loaded up with debt that is quickly coming due.
The wall of refinancing that these firms face may be $100 billion more than many expected, according to Moody’s.
And private equity firms are trying to sign longer loans to avoid having to refinance again soon. The average L.B.O. loan is now 5.6 years in length compared with 5.2 years just last year.
According to Dealogic, private equity firms are signing very few fresh deals. The current volume of loans backing new buyouts is 89 percent below the record of $681.5 billion set by this time in 2007. The value of deals that private equity firms have exited is 44 percent lower than the $279.6 billion they racked up by this time in 2007.
As the industry battles its dependency on debt, private equity’s long winter may rage on for awhile.
The chill seems to have set in shortly after two blockbuster demonstrations of private equity power in 2007: the buyout of Hilton Hotels and the initial public offering of the Blackstone Group.
In 2008, private equity firms broke up — or tried to break up — richly priced deals they had signed in flusher times.
In 2009, private equity firms had plenty of cash but little access to the debt markets to deploy their strategies.
In 2010, private equity firms, with two years of weak exits and skimpy returns, had trouble fund-raising. According to Prequin, 242 funds raised $116 billion in the first half of 2010 compared with 336 funds that raised $171 billion in the second half of 2009.
In 2011, the industry’s revival may depend on whether firms can work through their debt issues while the markets are still open. To do that, private equity may have to scale back its ambitions and operate more cautiously, looking for known quantities rather than grand risks and high returns.
As the longtime investment banker Kenneth D. Moelis pointed out at a conference last week, the J. Crew and Del Monte deals were still relatively small in size for private equity deals. He predicted that such smaller buyouts would become more common, as private equity gave up its dream of the $100 billion “Big One” and focused on the more mundane job of turning around midmarket companies.
Consider one of the bigger potential deals: the Carlyle Group’s public offering. While Blackstone cashed out when times were good and valuations were high, William E. Conway Jr., a Carlyle founder, recently told Bloomberg News that the firm was going public because it was harder to get access to capital.
It’s a good insight into private equity in the aftermath of the financial crisis: the big players, once known to embrace risk and swagger, are stuck looking for sustenance for their troubled companies.
The barbarians at the gate are looking more like beggars these days.

Monday, November 15, 2010

M.&A. to Hit $3 Trillion in 2011, Report Says

By EVELYN M. RUSLI, NYT DealBook, November 15, 2010
The recent rebound in mergers and acquisitions is expected to strengthen significantly next year, according to a new report, with global deal activity on track to rise 36 percent, to $3.04 trillion.
The total would be the highest amount since 2007, when the market logged $4.28 trillion in deals in the months that preceded the financial crisis.
A widespread surge in confidence will power the rally, according to the report, a joint project by Thomson Reuters and Freeman Consulting Services that included interviews with 150 executives from a broad swath of industries.
“Respondents in every sector are forecasting increased mergers and acquisitions for 2011,” Matthew Toole, Thomson Reuters’ director of deals intelligence, said in an interview. “Capital markets activity will also continue to be robust, with increased corporate bond issuance and syndicated lending, driven by refinancing activity.”
The numbers tell the story.
The totals are far from levels before the recession, when leveraged buyouts frequently fetched multiples of 15 times earnings before interest, tax, depreciation and amortization, but the appetite for deals is gaining momentum despite lingering concerns in the credit markets.
After hitting a recent low in 2009, with $1.98 trillion in deals, the volume of mergers and acquisitions is expected to rise 12.6 percent this year, to $2.23 trillion, and pick up speed in 2011, according to the report.
On the equity capital markets side, activity is forecast to rise 21 percent next year, to $920 million, while corporate bond issuance should gain 14 percent, to $1.28 trillion.
The report also predicted that two sectors would shine in 2011 for deals: real estate and financial firms. After being pummeled by the credit crisis, many companies from these industries will need to restructure their businesses, pursue consolidation, divest assets or simply play catch-up.
“Financials seem to be the most bullish on a percentage basis,” Mr. Toole said. “This year we saw Goldman Sachs divesting its prop trading desk. … Now we’ll see it on a fuller scale.”
Mr. Toole added that investors should also expect decent deal volume in the health care sector, where competition is driving mergers and acquisitions.

Monday, October 25, 2010

Merger and acquisition activity stirs among Northeast Ohio companies

By DAN SHINGLER, Crains's Cleveland Business, 4:30 am, October 25, 2010
A look around Northeast Ohio's industrial landscape makes one thing quickly apparent: It's a great time to sell a company. And if local investment bankers, private equity managers and manufacturers themselves are any indication, the pace of mergers and acquisitions is only going to continue, if not accelerate, at least through the end of this year. Driving the deals is a combination of coming tax changes, newly available cash, rising company valuations and a group of sellers that's been kept out of the market for two years. “There are some really fine companies out there for sale,” said investment banker Ralph Della Ratta, managing director of Western Reserve Partners in Cleveland. A few of them already have been bought. Fairmount Minerals of Chardon is cited by some in the M&A arena as the first large local company to take advantage of the new environment. In August, its owners sold a controlling stake to a New York private equity firm, American Securities Capital Partners. The sum was not disclosed, but the deal involved at least $775 million in debt that observers said probably could not have been raised in 2009. Since then, the deals have come with increasing frequency and, as was the case with Fairmount, they've involved big names in the region's industrial economy. Solon-based Keithley Instruments, which employs 550, announced Sept. 29 that Danaher Corp. was buying the maker of test and measurement instruments for $300 million. Cleveland-based Hawk Corp. announced Oct. 15 that Carlisle Cos. planned to purchase the maker of friction products for brakes and clutches for $413 million. And just last week, Hexpol AB of Sweden said it would buy Solon-based Excel Polymers for $212.5 million. Proving their mettle
These companies might be attractive to buyers not in spite of the recession, but because of it. Any company doing well and earning a decent profit today has been stress-tested, said Hawk president Chris DiSantis, and that's an attractive quality to potential buyers. “Look at Hawk,” he said. “It doesn't get much worse for us than 2009.” In 2009, Hawk's revenues were down 35% from 2008, Mr. DeSantis said, but it still managed a profit before rebounding this year. Aside from the large companies being bought here, other local entities are involved in acquisitions, though the deals they're cutting are often in far-flung lands and do not garner much local attention. Private equity firms such as Linsalata Capital Partners in Mayfield Heights and Riverside Co. in Cleveland busily have added companies to their portfolios. Meanwhile, manufacturers such as specialty chemical producer Omnova Solutions in Fairlawn and Akron-based plastics resins supplier A. Schulman Inc. have made strategic acquisitions of other companies in their industries to expand their offerings and markets. As for when the blizzard of activity will end, there's some disagreement. But most think the pace will keep up through the end of this year and some think it will continue even thereafter. “I think you'll see more activity in 2011 than you are seeing even now in 2010,” said Steve Rosen, co-chief executive officer of Resilience Capital Partners in Beachwood. Confluence of influences
There are several factors making the deal flurry possible. For one, companies are profitable again after the downturn of 2008-2009. The rebound in their bottom lines means when companies are priced for sale, generally using some multiple of their earnings, the price once again is high enough that sellers are interested. Also, sellers are trying to avoid an increase in the federal capital gains tax rate, set to rise next year to 20% from 15% and widely expected to increase down the line. And then there's the impact of private equity firms, such as Mr. Rosen's Resilience Capital. Typically, these firms raise money from investors with a plan to invest the money by buying private companies, holding and improving them for five to seven years, and then selling them at a profit. During the financial crisis and recession, those sales could not be made, even though the investments had matured. So private equity firms have a pent-up need to divest some of their holdings, Mr. Rosen said. Finally, would-be buyers again are able to buy. Funds and financial buyers have access to credit again and many companies that survived the downturn amassed large war chests of cash in the process. “What you've got going on in the market right now is a combination of higher supply and higher demand,” Mr. DiSantis said. A rush to year end
It's all keeping Western Reserve Partners' Mr. Della Ratta busy. “We're involved in 22 deals right now, but not all of them are in Ohio,” he said. “I think we've got two or three more that we're about to sign up.” Mr. Della Ratta said he thinks local companies are the buyer in deals as often as they are the seller, and that international deals and strategic acquisitions of similar companies are the prevailing trends among company mergers. Among sellers, private equity firms are the most active right now, he said. That jibes with what Mr. Rosen said he's experiencing. “We're in the process of selling three companies now,” Mr. Rosen said during a telephone interview from the airport last Tuesday, Oct. 19, before he left for his next deal. But some think the spate of sales will last only through the end of this year, before tapering off or even declining in 2011. Sellers know the capital gains tax is going to increase on Jan. 1, which could have the same accelerating effect on corporate acquisitions that the expiration of the homebuyers tax credit had last spring on residential real estate sales, predicts Eric Bacon, senior managing director of Linsalata Capital. Deal flow won't die, but ...
Mr. Bacon declined comment on a recent Reuters report that Linsalata is preparing to sell Transtar Industries, a distributor of transmission parts based in Walton Hills. Reuters said Transtar is on the block for about $700 million. Generally, though, Mr. Bacon said sellers are rushing to get their deals done before the end of this year and, after that, there will not be as much urgency to sell. “I'm working on some deals now and they were saying, "If you want to be a player, you have to close by year end,'” Mr. Bacon said. Mr. Bacon said his firm's deal flow picked up in July and August and since has slowed a bit. He's one who thinks the wheeling and dealing will slow soon, but not come to a virtual stop as it did during the financial crisis and recession. Deal flow, he said, is significantly greater than it has been in the last two years. That's a trend Mr. Bacon said will continue through 2011, even if the pace does slow from its current rapidity. Mr. DiSantis agrees, saying, “I wouldn't be surprised to see a weak January and February in the deal market. Anyone who could compress their schedule pulled everything they could into December.”

Friday, October 22, 2010

The Buyout Gospel According to Rubenstein

Tom Fairless, of Financial News, reports:
David Rubenstein, co-founder and traveling salesman for Carlyle Group, is fond of firing off lists of emerging trends at industry conferences. His latest predictions were made at a speech at the SuperReturn Middle East conference in Abu Dhabi this week.
1) The private-equity industry is shrinking. Deal and fund sizes will be smaller, leverage will remain below its peak and there will be fewer club deals. Large investors will give money to fewer firms. The jury is still out on whether the megadeals and funds from the boom years will yield strong returns.
2) But investor interest is returning. They have concluded that private equity withstood the downturn better than almost any asset class, partly because of its illiquidity, which protected investors from panic sales.
3) Return expectations have fallen. Investors have become more realistic.
4) Investors also have more clout and will demand and receive greater transparency from buyout firms and a better alignment of interests, particularly on management fees. Guidelines issued by the Institutional Limited Partners Association, a trade body for investors in private equity, will have a considerable impact.
5) Big investors will demand preferential treatment. They will seek lower fees and higher hurdle rates.
6) Governments want to get more involved. They will seek to protect stakeholders with new regulations such as the US Volcker Rule, which will deter big banks from sponsoring private equity funds.
7) The industry has gone mainstream. Buyout firms and their investors have deepened relations with government, media, consumer and environmental groups, rather than focusing exclusively on returns.
8) Brand value is increasing. Firms will start to advertise to build their brand names and aid fund-raising.
9) Global reach is increasingly important….
10) …particularly exposure to emerging markets. China is in a league of its own among emerging markets and will attract enormous amount of private-equity capital, while India and Brazil are not far behind. The Middle East and Africa will become increasingly attractive.

Megadeals Go Missing From M&A Rebound as Companies Avoid Risk

By Alex Sherman and Zachary R. Mider -
Oct 22, 2010 12:01 AM ET
This year’s rebound in mergers and acquisitions has one conspicuously large absence: the megadeal.
Announced takeovers of more than $25 billion are set to make up the smallest percentage of total deal volume in any year since 2002, according to data compiled by Bloomberg. BHP Billiton Ltd.’s offer for Potash Corp. of Saskatchewan Inc. is the only bid this year valued at more than $30 billion, and there have been only two others valued at more than $25 billion, including net debt.
Companies are spending stockpiled cash on smaller competitors that complement their business rather than pursuing transformational takeovers. While 73 percent of transactions this year have been less than $5 billion, the purchases have put dealmaking on pace to surpass last year’s $1.78 trillion in volume and may portend the return of more sizeable acquisitions.
“The drop-off in the very large transactions is masking a significant pickup in $1 billion to $5 billion deals,” said Gary Posternack, head of M&A for the Americas at Barclays Plc, in an interview. “Companies are looking at transactions that are lower risk, closer to the core business of the acquirer, and perceived as being synergistic.”
The biggest deals so far this year account for just 5.8 percent of total volume, while acquisitions from $1 billion to $5 billion have risen to 34 percent, the highest in at least a decade, according to Bloomberg data. Transactions less than $1 billion account for 39 percent of the total, a six-year high, the data show.
Cash Available
Many conditions for a comeback in bigger deals are in place. The 1,000 largest non-financial companies have almost $3 trillion on their balance sheets, and financing rates are near record lows. The Federal Reserve’s October Beige Book, released Oct. 20, noted that M&A lending picked up in some areas.
There is pent-up demand for smaller deals even if banks are unwilling to commit tens of billions of dollars in financing, according to Hiter Harris, managing director and co-founder of Harris Williams Co. in Richmond, Virginia, whose firm specializes in advising on transactions valued at less than $1 billion.
“The middle-market deal flow is a six- to nine-month leading indicator for the rest of the market and the economy,” said Harris, who expects more deals will top $25 billion in 2011.
Banks are willing to lend to creditworthy buyers, as evidenced by the $45 billion of loans Melbourne-based BHP Billiton obtained for its Potash bid. Potash rejected the $40 billion offer, excluding debt, as too low.
‘Story of Ego’
Other potential targets may also be balking at offers because they anticipate their valuations will rise, according to Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global Markets LLC in New York.
“This is a story of ego,” said Shah. “Boards are saying, ’I’m a $25 billion company, I’m not the prey, I’m a survivor, I’m the predator.’”
Buyers don’t appear to be looking for transformational opportunities, according to Richard Hurowitz, chairman and chief executive officer at Octavian Advisors LP, who invests in risk arbitrage. Instead, they are actively seeking strategic deals with more “reasonable” valuations, he said.
International Business Machines Corp.’s pending takeover of Netezza Corp. for $1.67 billion and Unilever’s agreement to buy Alberto-Culver Co. for $3.7 billion are two examples of same- industry, all-cash deals announced since the beginning of September.
Biggest Deals
While deals between $5 billion and $25 billion have increased from last year, both in total number and in overall value, they are still below levels from 2005 to 2008, data show.
None of the three biggest deals this year have involved a U.S. company. The country’s unemployment rate is hovering at 9.6 percent and consumer confidence unexpectedly fell in October.
Aside from BHP, the other announced offers topping $25 billion this year are GDF Suez SA’s $25.8 billion bid for London-based International Power Plc and America Movil SAB’s $25.7 billion proposed purchase of Carso Global Telecom SAB. Both of those companies are controlled by billionaire Carlos Slim.
The compiled data include net debt and exclude terminated deals, such as this year’s $35.5 billion bid by London-based Prudential Plc to buy Hong Kong-based AIA Group Ltd.
A potential change in capital gains tax rates has also fueled smaller acquisitions, said Harris. President Barack Obama has proposed raising long-term capital-gain rates to 20 percent from 15 percent for individuals who earn more than $200,000 and couples that earn more than $250,000.
“The possible change in rates is a significant event for middle-market companies, but if you’re a $25 billion company, you’re probably not as focused on the changes,” Harris said.
To contact the reporter on this story: Alex Sherman in New York at asherman6@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net.

Tuesday, October 19, 2010

What Recent Deals May Say About M.&A.’s Future

NYT DealBook, October 18, 2010, The Deal Professor, Steven M. Davidoff:
Where is the market for mergers and acquisitions going? After a summer of prominent deal announcements and increased M.&A. activity, investment bankers are speculating that the market will grow 15 percent to 30 percent in the next year. Bankers tend to talk their book, but this time it looks like the market is likely to support a modest upswing, albeit one not as big as the bankers hope for.
While many chief executives continue to remain wary of M.&A. transactions and the risk they entail, credit today is relatively easy and cheap, providing real incentives to make asset purchases. But whether or not the upturn is coming, the more interesting question is what this market will look like over the next year.
Go to the Deal Professor from DealBook »

Monday, October 18, 2010

Headaches Can Crop Up After Private Deals Close, M&A Study Finds

Amy Miller, The Recorder, 10-18-2010:
It's not easy to sell a privately held tech company these days. But the real headaches sometimes begin after the deal closes, according to a new study by Shareholder Representative Service, which manages the post-closing process in M&A transactions for its clients.
The post-closing period can be "long, risky, and complex," the study found. Claims related to deals can be filed over an extended period of time, even after closing. Meanwhile, shareholders are increasingly demanding that certain conditions, such as performance goals, be met before the privately held company can cash out.
The study looked at more than 100 transactions that Shareholder Representative Services handled recently in which the terms were not publicly reported. The value of the deals, which involved primarily software, electronics, and telecommunications companies, ranged from about $25 million to $200 million.
According to the study, nearly two thirds of the deals allowed for possible changes to the final purchase price after closing.
Two thirds of the deals also set aside a portion of the merger consideration in escrow for more than a year, and more than half of the transactions had escrows that exceeded 10 percent of the deal value.
Even when the escrow period closes, consideration is still at risk. About 95 percent of the deals also had "carve outs," or exceptions, built into their terms that allowed claims against the transaction to be brought well after the deal closed.
And a quarter of the deals had "earnout," or performance hurdles, attached to them before shareholders could fully reap the full value of a sale. Such agreements are most common in life science or pharmaceutical deals, said SRS managing director Paul Koenig.
For example, the full value of deal to buy a pharmaceutical company might not be realized unless a particular drug gets approved by the Food and Drug Administration.
"Sometimes those are extremely complicated," Koenig said.
But in general, buyers across all industries have more leverage than in the past because the IPO window has closed for a lot of start-up companies. In the Silicon Valley tech world, it means that big companies like Google, Hewlett-Packard and Oracle can dictate the terms of a deal, and the target companies have little choice but to accept them.
Even if the economy improves and it becomes easier for start ups to go public, the trend isn't likely to change, Koenig said.
"My guess is these complicated structures are here to stay," he said. "Deals are going to remain more complicated than they were 10 to 15 years ago."

Friday, October 15, 2010

V.C. Funding Drops in 3Q, Mainly in Clean-Tech

October 15, 2010, 7:15 am — Updated: 7:15 am -->
Venture capitalists poured less money into U.S. start-ups in the third quarter and split this among more companies, signaling that investors are trying to be more economical with their funds, Reuters reported.
According to a study set to be released Friday, start-up investments declined 7 percent to $4.8 billion in the July-September period, compared with $5.2 billion invested during the same three-month period in 2009. A total of 780 start-ups received funding during the quarter — 9 percent more than the 716 companies that took slices of the investment pie last year.
The study, which was conducted by PriceWaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters, said that much of the decline stemmed from a drop in large investments in clean technology. Funding in clean-tech start-ups, which include alternative energy, recycling, conservation and power supply companies, has been mercurial lately. It fell every quarter last year compared with the previous year, but has been climbing this year — until the third quarter.
Despite the third-quarter funding drop, though, funding for the full year still looks to be higher than it was in 2009. So far this year, venture capitalists have invested $16.7 billion in 2,497 start-ups; in all of 2009, $18.3 billion was funneled into 2,916 start-ups.
Go to Article from The Associated Press via The New York Times »

Tuesday, October 12, 2010

Is Deal Making Back in a Groove?

WSJ Deal Journal, Oct. 12, 2010:
By Shira Ovide
That at least is one takeaway from the prognosticators at Standard & Poor’s.
S&P Valuation and Risk Strategies said since 1998, fourth-quarter deal volume has risen an average of nearly 15% from the prior three months. Capital IQ reported $185 billion of deals announced in the third quarter. S&P said that assuming the average historical trend for October to December, the deal volume for the fourth quarter could “reasonably exceed” $211 billion.
Already the fourth quarter has seen a string of solid, if not blockbuster, deals. GE made a $3 billion bid for energy infrastructure firm Dresser, Gymboree is slated to be bought for $1.8 billion by Bain Capital, and today Pfizer announced a $3.6 billion offer, or $14.25 a share, for King Pharmaceuticals.
At $211 billion, the fourth quarter would be the most active period for deal making this year. Of course, that could be said to be damning with faint praise, as that would be down about 11% from the fourth quarter of 2009 and well below the $447 billion of deals announced in the fourth quarter of 2006, the year with the most active fourth quarter for deals, according to S&P’s analysis of Capital IQ data.
To be sure, past performance isn’t predictive of future results. “A shock to the system could put this forecast on hold,” S&P director Richard Peterson cautioned. But please forgive battered investment houses for hoping S&P is right.

Thursday, September 30, 2010

Deal Makers Cautious

September 30, 2010, 12:41 pm — Updated: 1:16 pm -->
Deal Makers Cautious Despite Uptick in M.&A.
A pickup in mergers and acquisitions over the last two months has the bulls on Wall Street thinking that the deal market is back in full force. But many senior deal makers remain cautious about the increase in M.&A. activity, given the continued uncertainty in the direction of the economy.
“Basically, M.&A. is a function of a market economy, and there are so many factors that come into play that there is no way to predict what will happen in the future,” Martin Lipton, one of the founding partners of the law firm Wachtell Lipton Rosen & Katz told DealBook at the Bloomberg Dealmakers Summit on Thursday in New York. “Yes, there has been a significant increase in activity lately — sometimes that portends an increase in deals, sometimes it doesn’t.”
M.&A. activity did pump up in August, which is normally one of the slowest months for deals of the year. That enthusiasm carried over into September with a number a major transactions announced, including Southwest Airlinesannouncement on Monday that it would acquire AirTran, a rival budget airline, for nearly $1.4 billion. Global M.&A. volume totaled nearly $730 billion in the the third quarter, up 43 percent from a year earlier, according to data from Dealogic.
But this past performance is not impressing deal makers. While they are seeing more deals in the pipeline these days, they are only seeing the strongest and largest companies emerge with completed transactions.
“The system is in a state of slow recovery,” Roger C. Altman, the founder and chairman of Evercore Partners, said at the conference. “Parts of it are functioning very well in relation to where it was and other parts of it, like middle-market lending, are functioning very poorly and are a very, very long way from recovery.
“If you look at the amount of commercial investment loans outstanding, they have been relentlessly declining for almost two years, and you know you cannot have a true healthy economic recovery with bank credit lending like that.”
But Timothy Ingrassia, the head of mergers and acquisitions for Goldman Sachs in the Americas, believes that while financing may still be an obstacle in doing some deals, the main obstacle he sees has shifted from debt to the equity side of the transaction.
“If you think about a $10 billion deal that requires $4 billion of equity, you are talking about multiple private equity firms that have to get together,” Mr. Ingrassia said at the conference. “Right now, that dynamic, creating consortia and having buyers back in unity to get something done, may be the most difficult piece of the deal, while six months ago I would absolutely say that financing was the most difficult part of the deal.”
Despite the difficulties in arranging club deals, Blair Effron, a partner at Centerview Partners, believes strongly that private equity will probably be the biggest part of the deal market in the next year. Many private equity firms will need to exit their investments and so that could mean a large uptick in deal activity there.
Regulatory changes that would increase the amount of taxes that private equity firms would have to pay to exit certain deals is likely to determine whether some new deals get done. But there seems to be only modest concern from deal makers, or their clients, about the impact that the sweeping new financial regulatory law will on their business.
“I find that general legislation like Sarbanes-Oxely and Dodd-Frank does not that much of an impact,” Mr. Lipton told DealBook. “Dodd-Frank has more of an impact on financial transactions, but if there is an opportune transaction, Dodd-Frank will not interfere with them going forward.”
– Cyrus Sanati
Copyright 2010 The New York Times Company

Monday, September 13, 2010

Middle Market M&A on the Rise

Prices are rising, and deal volume is getting closer to precrisis levels. Is this a true recovery or a blip on the M&A screen?By KEN TARBOUS, Investment Dealers' Digest
September 12, 2010
Ridgemont Equity Partners, a Charlotte, N.C., financial sponsor, has been an active buyer of companies worth $10 million to $100 million this summer and it has plenty of company.
Last month, Mill Road Capital of Greenwich, Conn., completed a $91 million acquisition of Rubio's Restaurants Inc. of Carlsbad, Calif., and Austin Ventures snapped up YRC Logistics, a Kansas unit of YRC Worldwide, for $38.7 million.
Dealmaking has picked up from a year ago and it is expected to remain lively at least for the rest of this year. Sponsors are allocating more money to lower-middle-market businesses, and improved debt markets are allowing buyers to borrow more. Also, some market players cite concerns about potential changes in federal tax policy as a reason for the pickup in the pace of transactions.
According to Thomson Reuters, there were 72 deals worth $4.8 billion in the lower middle market last month, compared with 65 deals worth $3.7 billion in August 2009. (These mergers and acquisitions generally involve companies worth $10 million to $250 million.)
Private-equity firms have $400 billion of capital on hand to invest, according to Deloitte Corporate Finance LLC, and more than 75% of the firms that have raised funds this year are targeting middle-market companies.
"We've got improved debt markets, you've got an inventory of deals that has built up during the economic downturn that people couldn't really sell, and you've got an improving economy that's incentivizing people to take that inventory out to the market," said Travis Hain, a partner at Ridgemont. "And finally, you've got potential tax incentives, depending on one's views on capital gains, and obviously there's a predominant view that capital gains is going up."
His firm, which Bank of America Corp. spun off last month, invests in basic industries, consumer and retail, energy, financial services, health care, and telecommunications, media and technology. This week, it announced it had bought a majority interest in the data network provider Unite Private Networks, and last week it said it had sold its interest in the fiber-optic broadband provider Fibertech Networks.To some degree, the pickup in activity may be exaggerated by the sharp decline in M&A transactions that took place during the credit crisis; while the debt market conditions have improved, there is a cap on how much a sponsor firm can borrow. Others say the activity is being propelled by the simple fact private-equity funds get paid to put money to work.
In the second quarter, according to Thomson Reuters, there were 257 U.S. deals worth $17.7 billion involving companies with enterprise values of between $10 million and $250 million. A year earlier there were 199 such deals worth $10.7 billion.
GF Data Resources, which collects data from more than 150 private-equity firms on transactions valued between $10 million and $250 million, reported a similar pattern among the financial sponsors it covers. In the second quarter, these sponsors closed 26 deals in the lower middle market, versus 16 in the first quarter and 15 in the second quarter of last year.
Private-equity sponsors and M&A bankers say that even though this year's volume does not match that of the heady days of 2005 to 2007 (a three-year period when, by some industry estimates, buyouts totaled more than $1.6 trillion), there are "record or near record" numbers of companies up for sale now, and those companies have a goal of closing deals this quarter or the next.
"If even a fraction of these deals get done, it will be a very interesting couple months," said Justin Abelow, a managing director of the financial sponsors coverage group in the New York office of Houlihan Lokey. "I think one of the things that's going to happen is that there'll be a tension between getting some of these deals done as M&A deals and just doing dividend recaps of one sort or another, particularly where people think they are not going to get their prices."
Hain says the backlog and the rush to market have a positive side.
"The good news for everybody is that this inventory of deals that built up over two or three years, they're all quality companies," he said. "The first companies that come out in this environment are the best companies. We're tending to see better companies, and there are some companies that, in certain circumstances, you can afford to pay higher prices for, depending on what a buyer thinks that you can add to the equation as a buyer and investor."
Valuations are returning to what dealmakers call more realistic levels. The multiples paid for companies in the lower middle market are on the rise, according to GF Data. The average multiple climbed from 5.1 times EBITDA in the third quarter of last year to 5.2 in each of the following two quarters to 5.6 in the second quarter of this year. Companies sold in the second quarter of last year fetched an average of 6.7 times EBITDA.
Hain says improved conditions in the debt markets have provided an impetus for deals this year. "The debt markets are facilitating transactions very actively, whereas the debt markets were a real impediment to deals last year."
In addition, the equity and debt structure of the deals has been stabilizing. Debt as a percentage of the average deal's capital structure increased to 42.4% in the first half of this year, versus 28.2% for all of last year, according to GF Data.
The equity percentage dropped from 59.0% last year to 53.3% in the first half of this year, but that's still "a high number by any kind of historical standard, so it shows that the overhang of equity capital that is still to be invested that has been raised by these private-equity sponsors, that there's a lot of pressure to deploy that capital," said Graeme Frazier, principal and co-founder of GF Data.
Market participants, citing proprietary data, pitch count and new assignments, say there might not be enough middle-market bankers and private-equity professionals to handle the plethora of deals in the market, and processes may be truncated as a result.
"This is as busy as that market has ever been, after a time of relative inactivity, and there may not be as many people in all parts of that market as there used to be, but there is much more activity," said one market participant, who asked not to be identified. "I think people are trying to push a lot of water through a relatively narrow pipe, and I think that pipe is near a bursting point."

Thursday, September 09, 2010

Banks, Bosses Benefit from U.S. Supreme Court's Tougher Lawsuit Standards

By Thom Weidlich - Bloomberg.com, Sep 9, 2010
Two U.S. Supreme Court decisions making it tougher to pursue lawsuits may have begun to bear fruit for corporations fighting investor claims or employee litigation.
Where once it was enough to give a defendant “fair notice” of a claim and the grounds on which it rested, the high court’s 2007 holding in Bell Atlantic Corp. v. Twombly required an antitrust complaint to contain enough facts to show a claim that is “plausible on its face.” Two years later, in Ashcroft v. Iqbal, the court applied Twombly to all federal civil suits.
The Supreme court rulings mean that someone who wants to sue in federal court “should not subject a defendant to the costs and burdens of litigation when there is no plausible basis for their claims,” Lisa Rickard, president of the U.S. Chamber of Commerce’s Institute for Legal Reform, said in an e-mail. The Washington-based business advocacy group filed a friend-of-the- court brief in Twombly.
The rule aided financial-services companies after the February 2008 collapse of the $330 billion auction-rate securities market.
Judges cited Twombly alongside the 1995 Private Securities Litigation Reform Act, which also added hurdles to investor cases, in dismissing suits against Citigroup Inc. and Bank of America Corp.’s Merrill Lynch unit over the sale of the securities.
‘Keys to the Courthouse’
“Implausible conclusory allegations are no longer keys to the courthouse,” Scott D. Musoff, a partner at Skadden, Arps, Slate, Meagher & Flom LLP in New York and a lawyer for Merrill Lynch in the auction-rate litigation, said in an e-mail. “This is especially important in the wake of a financial crisis when people are looking for someone to blame for their losses even if they have no factual basis to support their claims.”
Musoff wouldn’t comment specifically on Merrill’s auction- rate case.
Plaintiffs’ lawyers say the justices’ new threshold unfairly closes the courthouse to their clients or increases their costs by forcing them to gather facts before suing, often before they can gain access to key information. Fred T. Isquith, a plaintiffs’ lawyer in class actions, criticized the Twombly court for trying to cut caseloads at the expense of litigants seeking redress.
“It is the most fundamental task of government to administer justice and provide judgment,” Isquith, a partner at Wolf Haldenstein Adler Freeman & Herz LLP in New York, said in an e-mail. “Dismissing cases is not the solution; the solution is more judges and more money for the court system.”
Waste Management
In tossing out James Stenger’s age-bias lawsuit against his employer, a waste management firm owned by Zurich-based Credit Suisse Group AG, U.S. District Judge Eric F. Melgren in Kansas City, Kansas, said the claim didn’t raise enough facts to cross the line “from conceivable to plausible.”
Melgren allowed Stenger, 55, a former customer-relations worker at Shawnee, Kansas-based Deffenbaugh Industries Inc., to refile his complaint with more detail. Deffenbaugh again asked the judge to dismiss. He has yet to rule.
Twombly and Iqbal supplanted the standard set by the Supreme Court in Conley v. Gibson in 1957. Under Conley, a suit could be dismissed if “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief.”
Federal civil cases typically proceed from the complaint to the motion to dismiss, followed by an evidence-gathering stage known as discovery, then summary judgment if there are no facts in dispute that would require a trial to resolve.
Earlier Disposal
Twombly and Iqbal are part of a trend to dispose of suits earlier in the process, said Arthur R. Miller, a professor at New York University School of Law. In 1986, the Supreme Court made it easier to decide a lawsuit between discovery and trial.
“Twombly-Iqbal now moves it to the motion to dismiss based on a single document, the complaint, with no opportunity for discovery,” said Miller, who is also special counsel to New York-based law firm Milberg LLP, which represents plaintiffs in securities litigation. “It’s becoming a big battle.”
The Chamber of Commerce says suits deserve more scrutiny in part because of the expense incurred by defendants in discovery. A report the group co-sponsored this year found that the discovery cost in 20 cases involving “major” companies averaged $621,880 in 2008, up from $488,847 for 15 cases in 2004.
Some U.S. lawmakers are seeking a return to the old, less restrictive standard. Pennsylvania Senator Arlen Specter’s bill, S. 1504, specifically mentions Conley. New York Representative Jerrold Nadler’s, H.R. 4115, refers to the “no set of facts” standard. Both Democrats’ bills are in committee.
Dollar General
In August 2009, U.S. District Judge Norman K. Moon in Lynchburg, Virginia, threw out a complaint brought by Holly Branham for injuries she allegedly sustained after slipping on liquid in a Dollar General Corp. store in Amherst, Virginia, while shopping for clothespins. Branham sought $300,000.
Citing Twombly and Iqbal, Moon said Branham “failed to allege any facts that show how the liquid came to be on the floor, whether the defendant knew or should have known of the presence of the liquid or how the plaintiff’s accident occurred.”
The judge let Branham amend the complaint to add the fact that an assistant manager had just mopped the floor. Dollar General, based in Goodlettsville, Tennessee, didn’t seek dismissal and the parties settled.
“It clearly does push forward the cost for the plaintiff side to look into a situation that might give rise to a claim, but I just have not seen that quantified,” said Richard A. Nagareda, a professor at Vanderbilt University Law School in Nashville, Tennessee, who discusses Twombly and Iqbal in an article due to be published in the DePaul Law Review next year.
Monitoring Consequences
The Advisory Committee on Civil Rules of the Judicial Conference of the U.S., the federal courts’ policy-making group, is monitoring the consequences of Twombly and Iqbal.
The effects of the decisions were debated at a May conference at Duke Law School in Durham, North Carolina, and the committee plans to present a report on the discussion to U.S. Chief Justice John Roberts before the Judicial Conference meets Sept. 14, said John Rabiej, chief of the Rules Committee Support Office.
Patricia W. Hatamyar, a professor at the St. Thomas University School of Law in Miami Gardens, Florida, analyzed a sample of federal cases and found it four times more likely for a motion to dismiss to be granted under Iqbal than under Conley.
Sample of Cases
In another sample of cases, dismissals were granted 38 percent of the time they were requested in both the four months before Twombly and the four months after Iqbal, according to an Aug. 12 report by the Administrative Office of the U.S. Courts, the support agency for the federal system.
“The case law to date does not appear to indicate that Iqbal has dramatically changed the application of the standards used to determine pleading sufficiency,” according to a July 26 Judicial Conference public memorandum.
The cases include Stenger v. Deffenbaugh Industries Inc., 09-cv-2422, U.S. District Court, District of Kansas (Kansas City); and Branham v. Dolgencorp Inc., 09-cv-00037, U.S. District Court, Western District of Virginia (Lynchburg).
To contact the reporter on this story: Thom Weidlich in Brooklyn, New York, federal court at tweidlich@bloomberg.net.

Wednesday, September 01, 2010

August Deal Activity

August’s unseasonable burst of dealmaking — the busiest in over a decade — could herald a wider rebound in M&A for the remainder of the year as low interest rates, record cash piles and low stock-market values encourage chief executives to strike deals, Reuters writes.
Previously deal-starved bankers and lawyers canceled holiday plans and worked through vacations in August, as companies had the gusto to launch hostile bids or fight over target companies.
Announced deals and offers during the typically slow month of August surged to $262 billion worldwide, according to Thomson Reuters data.
It is the highest value of deals and offers announced during an August since 1999 when the value reached $275 billion. Still, by number of deals, it ranks lower than last August.
The nascent mergers and acquisitions rebound, already spanning various sectors and countries, could pick up further when the traditional busy period starts, after the U.S. Labor Day holiday and the United Kingdom’s August bank holiday, bankers predict.
“What you have seen in August, that took people by surprise, is that there are some CEOs that have the confidence to pull the trigger and embark on a hostile transaction, or jump an agreed transaction,” said Chris Young, head of takeover defense at Credit Suisse in New York. “It is a bullish sign for the rest of the year.”
Go to Article from Reuters via The New York Times »

Monday, August 30, 2010

As I.P.O.’s Stall, M.&A. Thrives

Languishing stock prices have put a brake on companies’ bids to tap public markets for new capital, while sparking a whirlwind of mergers and acquisitions from firms rushing to take advantage of cheap valuations, Reuters reported.
A number of United States companies have delayed their plans for an initial public offering after recent issues suffered in a weak stock market and forced a steep I.P.O. discount, bankers said, adding that more companies are engaging in a dual-track I.P.O. and M.&A. process.
The prospect of a continued fragile economy and choppy stock market conditions is making I.P.O.’s a less attractive way to raise capital, and more companies are considering a sale instead, bankers said.
“If the I.P.O. market is choppy, that gives a leg up to M&A and more of those (deals) may end up converting to M&A opportunities,” said Richard Truesdell, co-head of the global capital markets group at law firm Davis Polk & Wardwell.
Go to Article from Reuters »

Friday, August 27, 2010

For Big Firms, It’s Been Light in August

A wave of deals in what is typically a sleepy summer month is keeping bankers and analysts very busy. Yet the giants in M.&A. advisory work have seen their shares of the market slump in August, according to Thomson Reuters data.
Goldman Sachs, at the top of the league table for August with 27 global deals worth $97.7 billion, has had a decline of 6.9 percent in the dollar value of deals for the month, compared with the month a year ago, Thomson Reuters says. That came even amid a 28 percent increase in the number of deals on which Goldman advised.
Morgan Stanley — the second-leading adviser in August — has had a 17 percent drop-off from a year ago. JPMorgan Chase saw a decline of 2.2 percent, while Citigroup experienced a 16.9 percent fall .
Among the top banks, only Barclays Capital has enjoyed a pickup in deal activity, with a 3.3 percent gain from August 2009, enabling it to move up to seventh place in the league table for the month from 12th a year ago.
More but smaller deals, of course, mean more, but smaller fees for the investment banks. And the bulk of the advisory fees are typically not paid until the transaction closes, many months from now.
At that point, August will be just a fading summer memory.
Go to Related DealBook Column by Andrew Ross Sorkin »Go to Related Article from DealBook

Wednesday, August 25, 2010

Pension Funds Drawing Up List of Targets

Shareholders may soon get more power to shake up corporate boardrooms in the United States after the financial crisis exposed glaring weaknesses in how companies were managed, Reuters reports.
The Securities and Exchange Commission will meet at 10:00 a.m. eastern time on Wednesday to decide whether to adopt a rule that would give shareholders an easier way to nominate corporate board directors.
Giving shareholders the ability to place their director nominees on the corporate proxy statement has long been sought by big activist shareholders who want more say on how their companies are run.
Awaiting those new regulations, big activist pension funds are gearing up to compile a short-list of target companies in the next month, The Financial Times reported.
The move is part of a drive to shake up underperformers and will likely see the list come together after the September meeting of the Council of Institutional Investors –- a group whose pension funds have total assets of more than $3 trillion.
The proposal that would give shareholders the ability to seat their own nominees at the board of directors’ table is expected to be approved by the Securities and Exchange Commission on Wednesday.
Go to Article from Reuters via The New York Times »Go to Article from The Financial Times (Subscription Required) »Go to Article from The New York Post »

Tuesday, August 24, 2010

Are Mergers Back? Well, Sort Of

While this August has seen an unexpected resurgence in deals — huge deals — the banking business still hasn’t made up its mind where the trend is going, The New York Times’s Andrew Ross Sorkin writes in his latest DealBook column.
There are plenty of reasons to think that this boom can’t be sustained without a matching lift in consumer spending, but still, people are working through the night in Manhattan, their hands trembling as they tweak their final calculations over an 11th can of Red Bull.
What’s behind it? Companies chasing synergies, or locking in natural resources, or using up spare cash, Mr. Sorkin writes. But more importantly: how long can it last?
Read the column here.

Wednesday, August 04, 2010

The M&A Recession: A Recovery Is Still a Ways Away

By Stephen Grocer, WSJ DealJournal, August 4, 2010:
Let us know if we have asked this before, but is the M&A market in for a recovery in second half?
A rash of deals in the last two weeks of July pushed the month’s global announced deal volume to $224.6 billion–the highest monthly total this year. As such, the data sparked a bit of optimism about the prospects for deal making for the second half.
Overall, global M&A is up 13% this year, and deal making last month was higher in every region. After two years of falling deal volume, that is welcome news to M&A professionals.
Yet hopes for a M&A recovery have been dashed before. M&A activity jumped in the fourth quarter last year. But the recovery proved fragile. What was the first half’s biggest transaction–Prudential PLC’s purchase of AIA–fell apart. Europe’s debt crisis put a frost on deal making as worries that the global economic recovery would falter grew.
While concerns about Europe have retreated somewhat thanks to the stress tests on the Continent’s banks, handwringing about the strength of any economic recovery hasn’t. A host of economic data this week has suggested that the recovery is weaker than previously forecast. On top of that, a number of well-known investors are preparing for a period of falling prices.
Also, a closer look at the M&A data provides a less-than-overwhelming picture that a robust recovery is around the corner. For example, two of the biggest deals–BP’s sale of oil and gas fields to Apache for $7 billion and Caja Madrid’s acquisition of Bancaja–were driven more by the distress of the seller was by the confidence of the buyer. And U.S. M&A activity remains sluggish, down 5% from the same period last year.
As Deal Journal has said before, until companies gain more confidence in prospects for the global economic recovery, M&A is likely to remain muted. July didn’t dissuade deal watchers of this view.

Monday, July 26, 2010

New Report Asks: ‘Private Equity, Public Loss?’

NYT DealBook blog, Monday, July 26, 2010:
Just what’s going on with private equity? Activity in the industry is on the rise, so a fresh report on the industry is timely.
Enter Peter Morris’s “Private Equity, Public Loss?”, a report written for the Center for the Study of Financial Innovation, which highlights the basic misapprehensions that Mr. Morris believes many hold of the industry.
In the report, Mr. Morris says many investors are mislead to believe “interests are aligned,” a belief belied by a reality that is more complex.
The report’s chief points are these:
Realised returns are lower than advertised, even for top-quartile managers.
The quality is also lower: excluding high debt levels and general stock market performance, managerial skill accounts for only a fraction of the total return.
This calls into question fee structures, which may remove all the gains attributable toskill.
Conflicts of interest between investors and managers remain real and substantial.
Investors’ apparent failure to question the level and make-up of returns, and fees, raises questions about their collective status as “sophisticated investors”.
Perverse incentives in private equity may distort wider markets.
At the very least, private equity firms’ results should be measured more rigorouslyand made more transparent.
Go to Related Article from The Financial Times (Subscription Required) »
Go to C.S.F.I. Web site »

Wednesday, July 07, 2010

Private Equity Rides Again

NYT DealBook, Jul 07, 2010:
With an increase in secondary buyouts and a stock market more friendly toward initial public offerings, the private equity industry seems headed for something of a revival after grinding to near a stand-still during the financial crisis, The Deal Magazine writes.
As the New York Times noted in an article last month, among private equity players, competition for buyout targets has heated up and while prices are rising, from a historical standpoint, they remain attractive. Prices are well below the stratospheric levels of 2007 and 2008, according to Capital IQ.
Coupled with loosening up of credit, the industry is enjoying resuscitated dealmaking and profit taking, according to The Deal. Domestic leveraged buyout activity, which had dropped as low as $10.4 billion in the first half of 2009, passed $37 billion through June, the publication noted.
Yet, despite some pretty strong signs of recovery, private equity may not be headed to a 2007 redux, The Deal writes:
…the fact that the bidders managed to line up $10 billion in debt financing from various banks was a clear demonstration of the astonishing financial firepower that sponsors once again were able to marshal for the right deal. The debt harked back to the boom times, when $10 billion-plus LBOs proliferated. Could another era of supersized buyouts be in the offing?
The answer, all experts we spoke to agree, is no, because banks by and large remain constrained in what they can and will lend to buyouts. Nevertheless, the return of a semblance of normalcy to the business is heartening to many industry players.
Go to Article from The Deal »

Friday, July 02, 2010

Venture-Backed I.P.O.s Show Rebound as M&A Slips

From NYT DealBook, July 2, 2010:
Venture-backed initial public offerings are the highest since before the financial crisis, even as venture-backed M&A activity is slipping, according to a survey by Thomson Reuters and the National Venture Capital Association.
I.P.O.s have always been a key exit strategy for venture capital funds, a path that was essentially closed off by the moribund stock market in much of 2008 and early 2009, Reuters reported.
The number of venture-backed I.P.O.s in the second quarter is the highest it has been since the fourth quarter of 2007, according to the survey. There were 17 venture-backed I.P.O.s worth $1.3 billion in the second quarter, which was the third consecutive quarterly increase in volume and the second in dollar amount.
Electric carmaker Tesla Motors, which raised $226 million, was the largest deal of the quarter and rose more than 40 percent in its debut.
But there are still signs of uncertainty. Only five of the 17 I.P.O.s in the second quarter were trading at or above their I.P.O. prices at the close of markets on Wednesday and the deal flow is still far below historic highs. There were 86 venture- backed I.P.O.s worth $10.33 billion in the fourth quarter of 2007, the most recent peak in the venture-backed I.P.O. market.
Go to Article from Reuters »

Thursday, July 01, 2010

The Double Dip M&A Recession

By Michael Corkery, WSJ DealJournal, June 30, 2010:
Coming on a turbulent week like this, the title of the Boston Consulting Group’s latest report seems a tad optimistic: “Accelerating out of the Great Recession: Seize Opportunities in M&A” reads the headline of the report released today.
In reality, deal activity appears to be doing anything but accelerating. If anything, it appears to be scraping along the bottom. U.S. announced deal volume is down 13% in the first six months of the year from the same period last year, according to Dealogic date released today. In Europe, deal volume is down 5%.
The numbers are even more depressing considering the year-over-year comparison stretches back to a period in 2009 when economy was reeling from the worst financial crisis since the Great Depression.
Still, BCG is optimistic that the conditions for a recovery are in place. Among them: Stable capital and debt markets (despite European problems), and an expanding global economy (though the Chinese juggernaut shows signs of slowing).
The folks at BCG aren’t alone in their optimism, though. The Organization for Economic Cooperation and Development declares in a report today that “International Investment Free Fall Comes to an End.”
OECD concludes that international M&A activity is on track to match last year’s totals:
International M&A investment in 2010 totals $300 billion, putting it on track to reach 2009 levels, ending a two year streak of steep declines in 2008 (down 21% from the previous year and 2009 (down 53%). This “could signal that the bottom on the cycle has been reached,’’ the OCED report concludes.
It was only a year ago
that bankers and consultants were making similar optimistic pronouncements amid last summer’s M&A doldrums. But after a short uptick in the fourth quarter–thanks to big deals like Kraft Foods’s acquisition of Cadbury– the bulls turned out to be wrong.
There may be some debate whether the global economy is headed for a double dip recession. The picture seems much clearer in the M&A world. By most measures, it appears that M&A is mired in the second dip of a double dip hiatus.

Wednesday, June 30, 2010

M.&A. Activity Up Globally, but Regions Lag

NYT DealBook, June 30, 2010:
Mergermarket, an M.&A. intelligence service, reported a 2.9 percent increase to the number of deals going on globally in the first half, marking their total value at $828.9 billion, compared to $805.9 billion at the same time in 2009, The Financial Times said.
Greater increases in M.&A. activity were seen in the developing world, making a leap of 44 percent on last year’s level to $218.5 billion, The FT reported.
Mergermarket’s data offers a mixed picture of European deal-making: In the area of emerging markets, European buyers appeared in the highest volume, contributing to 61.2 percent of inbound M.&A.
However, the second quarter was noted by Mergermarket as the worst period for European M.&A. since the data firm’s records began 12 years ago, The FT said.
In the U.S., the firm’s findings were not much better, with M.&A. activity in the first two quarters dropping 18.8 percent across the region, putting the total worth of deals at $313.3 billion, the worst result since 2003, The newspaper reported.
Go to Article from The Financial Times (Subscription Requires) »

IPOs – Reason for Optimism?

From Piper Jaffray Private Equity Partners Market Update, Second Quarter 2010:
The IPO market in 2010 is off to a pretty good start. Year-to-date, there have been 53 IPOs, raising a total of $8.4 billion. This compares to 11 IPOs for $2.2 billion for the same period last year.
Early in the year, you could sense the optimism within the private equity community that the IPO window would reopen in 2010. While January and February were a little slow, March, April and May each produced a minimum of 11 IPOs and $1.3 billion raised. So far, June is slightly behind that pace (seven IPOs pricing through June 25) due to the market turmoil caused by the European debt crisis and perhaps recent post-IPO price performance. The class of 2010 IPOs is down an average of 3.5 percent versus a virtually flat year-to-date return for the S&P 500. Twenty-one of the 53 IPOs so far in 2010 are down more than 10 percent from the offer price and only 22 have traded up (as of June 25).
Regardless, the IPO backlog of companies in registration continues to grow, a sign that bankers and sponsors expect a robust IPO market in the coming months. There are currently 127 IPOs in registration, up from a low of 33 in August 2009. Most of them look viable. Less than 30 percent of the backlog is growing stale (more than four months old).
We have learned the following from recent discussions with institutional buyers of IPOs:
There is a strong demand for growth stories, which should bode well for VCs.
There appears to be less interest for LBO-backed IPOs. While institutional investors are still willing to participate in LBO-backed IPOs, they have become very price-sensitive. During the 2006–2007 boom of LBO-backed IPOs, the buyers were more apt to accept the valuation being pitched by the bankers. Today, investors are crunching the numbers themselves and telling the bankers where the deal needs to price. This is evidenced by nearly 50 percent of IPOs in 2010 pricing below their filing range, the highest percentage in years.
With few exceptions, the bar remains high for an IPO. Growth, profitability and predictability are the ingredients investors require. Median revenue for 2010 IPOs remains over $100 million while the median EBITDA is $24 million.
We anticipate the IPO market to remain choppy as investors continue to digest news of the global economy and the price performance of recent IPOs. An uptick in either category may add the necessary confidence to both issuers and investors to create a more steady flow of IPOs in the second half of the year.
Read entire article with charts at: http://www.piperjaffray.com/private/pdf/MarketUpdate_Q2_2010.pdf

Thursday, June 24, 2010

On Wall Street, So Much Cash, So Little Time

By JULIE CRESWELL, New York Times, June 23, 2010:

Private equity firms, where corporate takeovers are planned and plotted, today sit atop an estimated $500 billion. But the deal makers are desperate to find deals worth doing, and the clock is ticking.
The stores of money inside the private equity industry have ramifications far beyond the bid-’em-up crowd on Wall Street. Millions of Americans — investors, employees, retirees — have a stake in the game too.
Go to article: http://www.nytimes.com/2010/06/24/business/24private.html?th&emc=th

Wednesday, June 23, 2010

A Rise in M.&A. Activity Is Seen in the Near Future

NYT DealBook, June 23,2010:
Deal-making has been subdued in the first half of the year, partly because of the recent turbulence in the stock market. But mergers and acquisitions are likely to pick up as the year progresses, Ernst & Young forecasts.
“We’re seeing a strong deal pipeline,” Rich Jeanneret, Americas vice chairman for Ernst & Young Transaction Advisory Services, said in the firm’s midyear mergers and acquisitions report. “As we look towards the second half of 2010, we expect to see well-capitalized corporations and private equity firms continuing to put their money to work in select growth markets.”
According to a recent Ernst & Young study of more than 800 senior executives around the world, 57 percent of businesses say they are likely or highly likely to acquire other companies in the next 12 months, almost double that of the 33 percent surveyed in November 2009. The study also found that 47 percent expected to make the move in the next six months, compared with 25 percent when surveyed eight months ago
The deal market will be defined by smaller, higher-quality deals fueled by low interest rates and corporate cash stockpiles, said Steve Krouskos, Americas markets leader for E.&Y.’s Transaction Advisory Services. In addition, Mr. Krouskos believes strong growth prospects in such markets as Brazil and China will lead to a pick-up in deal volume, despite concerns over instability in other developing markets.
The first half of the year started strong but began to fade as the sovereign debt crisis in Europe put some deals on hold. Global M.&A. deal value totaled $810.3 billion so far during the first half of 2010, similar to where it was during the comparable period last year at $814.6 billion. But much of the deals done in the first half of 2009 involved government activity in the banking system. This year, the deals took place across a range of industries, as private equity firms and other companies took advantage of the thawed credit markets and strong equity markets.
Looking towards the second half of 2010, Ernst & Young believes M.&A. activity should continue to grow, as well-capitalized firms seek to expand through mergers and acquisitions and from the strengthening of the credit markets (assuming the economy stabilizes).
Fortune 1,000 companies have a combined $1.8 trillion in cash, a huge stockpile that can be used for acquisitions. Ernst & Young expects companies to seek smaller deals, but “higher quality” transactions, as well-capitalized companies hunt for acquisitions that complement their strengths.
– Cyrus Sanati