Monday, March 01, 2010

Four Thoughts About the Return of Merger Monday

From WSJ DealJournal, March 1, 2010:

By Michael Corkery
Merger Monday is back, at least for a week. There were six big deals, totaling $49.2 billion, unveiled this morning, from hostile pharmaceutical bids to the $35.5 billion sale of American International Group’s Asian life insurance unit.
So, what does today’s flood of deals say about the economy, the state of M&A and future deal making? Here are four takeaways:
Good things come to sellers who wait. When the stock market swooned last spring, the government decided to hold off on AIG’s asset sales in hopes of avoiding a fire sale. In the case of selling its Asian life insurance business, that strategy appears to have paid off. Assuming the deal closes, the $35.5 billion that Prudential is paying for the AIG business unit is nearly half as much as other suitors were offering for the business last spring, according to people familiar with the matter. Likewise, in another deal announced this morning, Millipore’s $7.2 billion acquisition by Germany’s Merck, the per-share price of $107 is nearly double the Massachusetts biotechnology-supply company’s 52-week low of about $55 last March.
USA, USA, USA – Ok, so maybe the U.S. has only the No. 2 hockey team in the world. Still, some large overseas companies are making big bets on U.S. companies. Germany’s Merck is spending $7.2 billion to acquire Millipore, while Japan’s Astellas Pharma has launched a hostile $3.5 billion bid for OSI Pharmaceuticals, of Melville, N.Y. Both deals involve large premiums to where the stocks were trading before the deals were announced–50% for Millipore and 40% for OSI. The high prices also speak to confidence in U.S. drug and bio-tech manufacturing and its American customer base.
Playing it safe: Those deal watchers longing for the blockbuster deals that were common earlier in the decade will be sorely disappointed by the deals of late. Recent deals are driven by strategy, like Coke’s purchase last week of its biggest bottler, Coca-Cola Enterprises, or by necessity, as in AIG’s sale of its life insurance unit to raise cash to pay back the U.S. government. Gone for now it seems are “transformative” mergers like AOL-Time Warner. Today’s deals also are focused on fulfilling term goals. For example, Astellas and Merck are being driven by an urgent need to replenish their pharmaceutical pipelines.
Pocket Change: With the exception of the AIA sale, today’s deals are each valued at less than $10 billion. So while there is a steady stream of deals, they aren’t carrying large price tags. With the economy still on shaky ground, few companies are taking risks and throwing expensive “Hail Mary” passes.

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