The Pace of Deal-Making Picks Up

By MICHAEL J. de la MERCED, NYT DealBook blog, April 1, 2010:
CORPORATE buyers are intensifying their hunt for deals — and they’re becoming a bit bolder.
More than two years past the start of the financial crisis, deal-making is continuing an ascent as companies seek to bolster their growth through mergers and acquisitions. And as their collective appetite grows, so too does their willingness to consider more aggressive international transactions or unsolicited bids.
The last few months have brought a welter of multibillion-dollar deals, like Comcast’s purchase of a majority stake in NBC Universal, Kraft’s successful $19 billion takeover of Cadbury of Britain and the American International Group’s $51.4 billion sale of two major units. And a spate of unsolicited hostile offers has emerged, notably the Simon Property Group’s $10 billion bid for General Growth Properties, which had filed for bankruptcy.
“The next two quarters will probably be defined as a very aggressive period of speed-dating, where companies will try out different combinations to see if they make strategic sense and are actionable,” said Paul G. Parker, head of global mergers and acquisitions for Barclays Capital.
Worldwide deal volumes swelled to about $564 billion for the three months ended March 31, according to data from Thomson Reuters, 18.4 percent higher than the same time last year. That is a little over half the deal volume of the first quarter of 2007 (which was nearly the peak of mergers activity), but deal-makers say they do not expect to reach those levels for some time.
“The economy’s far from ideal, but companies now have more confidence than they have had in the last 18 months,” said Victor I. Lewkow, a partner at the law firm Cleary Gottlieb Steen & Hamilton.

The conditions that foster successful deal-making are continuing to improve. The stock markets have largely stabilized, with the Standard & Poor’s 500-stock index rising almost 5 percent for the quarter, providing greater clarity into how much companies are worth and helping instill confidence in management teams about potential deals they may be considering.
Just as important, robust stock and credit markets have continued to make financing available for buyers contemplating a takeover. Interest rates remain low, and many strategic companies are drawing upon hoards of cash they stockpiled over the past year.
“The debt markets are wide open,” said Mark Shafir, Citigroup’s global head of mergers and acquisitions. “There’s a lot of capacity in the marketplace.”
Whereas mergers activity last year was dominated primarily by health care and financial services companies, deal-makers say now they are spending time on a broad range of industries.
“It’s across the board,” said Eduardo G. Mestre, vice chairman of Evercore Partners. “I have a very hard time saying that one sector is more active than another sector.”
The economic recovery has also helped alter the dynamics of buyers and sellers. The average worldwide deal premium has fallen nearly 5 percentage points, to 27.5 percent, for the first quarter, according to Thomson Reuters, although it rose 25 percent for transactions in the United States.
While buyers have gained more confidence in pursuing their targets, companies eyed as acquisitions have gotten a better sense of how much they are worth — and more are deciding that the best way to grow is to sell themselves.
“Many companies have moved toward new 52-week highs,” said Chris Ventresca, a co-head of North America mergers and acquisitions at JPMorgan Chase. “They still have uncertainty with regard to their business outlook and don’t see a catalyst for significant stock price appreciation. That provides some basis for sellers to think about traditional premiums over their current stock performance.”
Still, other potential acquisitions say that they are better equipped to grow alone, leaving insistent suitors to ponder whether to try a hostile takeover. Beyond Simon, Air Products and Chemicals, Astellas Pharma, Carl C. Icahn and Elliott Management are among those that have chosen to make unfriendly bids.
The improvement in the debt markets has also helped the private equity industry — largely relegated to the margins in 2009 — assert itself as an active presence once again. Leveraged buyout firms struck about $31.7 billion worth of deals during the first quarter of 2010, amounting to about 5.6 percent of all mergers activity worldwide.
Private equity firms like the Blackstone Group and Kohlberg Kravis Roberts have spoken of their billions of dollars in “dry powder,” or committed investor capital, for some time. Now, with banks proving willing to lend and investors comfortable with riskier bond and loan offerings, such firms are expected to push for bigger deals again, though not as large as the immense leveraged buyouts of three years ago.
Some are also finding buyers for some of their portfolio companies, like Apax Partners’ $3 billion sale of Tommy Hilfiger to Phillips-Van Heusen and Oak Hill Capital Partners’ $1.1 billion sale of Duane Reade to Walgreen. These sales help the buyout firms generate profit and clear room for future acquisitions.
“Private equity firms spent most of last year helping their portfolio companies,” said Randi C. Lesnick, a partner at the law firm Jones Day. “What we’ve been seeing and hearing is an uptick in their interest in new deals.”
Deals have also taken on a more international character: Cross-border transactions added up to about 36.6 percent of all mergers for the first quarter, nearly doubling last year’s number. Deal-makers point to a wide array of mergers, like the Kraft-Cadbury deal and the takeover of A.I.G.’s Asian life insurance arm by Prudential of Britain.
Emerging markets like China and Brazil have proved a font of deal activity: they accounted for $181.7 billion of deals this quarter, according to Thomson Reuters, or 32.2 percent of worldwide volume.
Their expanding presence in mergers and acquisitions has manifested itself both directly, as in Geely of China’s agreement to pay $1.8 billion for Volvo, and indirectly, as in Prudential’s effort to expand its Asian presence through its A.I.G. deal and Kraft’s desire for Cadbury’s footprint in India, Russia and other countries. (A few deals, including Sichuan Tengzhong Heavy Industrial Machines’ $150 million offer for Hummer, fell apart, reportedly because of regulatory troubles.)
Deal-makers say that as China and other developing countries continue to seek natural resources and to put their swelling coffers to good use, they will be seeking even bigger pieces of the mergers pie. “They are emerged markets,” said Antonio Weiss, Lazard’s global head of investment banking. “It’s become old-fashioned to think of these regions as emerging.”
Go to DealBook’s Spring 2010 Special Section »