M&A activity on the upswing
By Lisa Singhania, Associated Press writer
NEW YORK — With price tags as high as $63 billion and $58 billion, the merger business is awakening from the bear-market hibernation that made corporate marriages a tough sell the last few years.
Some 2,052 U.S. M&A deals were announced in the first quarter, up slightly from the 2,031 recorded in the last quarter of 2003, according to Thomson Financial. They were the first back-to-back quarters of 2,000-plus deals in nearly three years.
”It’s a sign of strengthening corporate earnings and economic growth,” said Richard Peterson, chief market strategist for Thomson Financial. ”When M&A was down in 2001 and 2002, the economy was in recession. Now that the economy is in a period of growth, M&A activity is resurging.”
The total value of M&A transactions is also climbing, to $226.8 billion in the first quarter from $216.4 billion in the final three months of 2003. The last time the quarterly tally was bigger was back in the fourth quarter of 2000, when announced deals added up to $346.3 billion.
So far this quarter, there have been 770 deals worth $72.4 billion, according to Peterson’s calculations.
Still, the mood in the M&A business is relatively subdued as companies, facing greater scrutiny from their shareholders and boards of directors, seek to avoid a repeat of the excesses of the 1990s, when the surging stock market led to sometimes exorbitant prices. The sky-is-the-limit attitude common in investment banking four years ago is no longer a given, analysts say.
”People have gotten used to idea of low-premium deals,” said Michael A. Plodwick, a banking analyst at Blaylock & Partners. ”Back in the 1990s, you would have assumed you would have to offer a 30 to 40 percent premium” of a company’s stock price or value ”to get the deal done”
He noted that J.P. Morgan Chase & Co.’s planned acquisition of Bank One Corp. for $58 billion in stock, gives Bank One shareholders roughly a 14 percent premium, conservative by ’90s standards.
Also, SunTrust Banks Inc.’s nearly $7 billion stock-and-cash acquisition of National Commerce Financial Corp. had a premium of roughly 5 percent to NCF shareholders — although that was on top of a 13 percent run-up in NCF’s stock before the deal was announced.
That leads some to question how long the cautiousness will last.
”Yes, there’s more cautiousness to pull the trigger, because of [the scandals at] Enron and Tyco,” said Judy Radler Cohen, editor of Thomson Media’s Merger and Acquisitions Newsletter. ”But some of that bad stuff, is starting to fade in our collective memory, and companies haven’t lost their desire to grow through acquisitions.”
Indeed, there have been a few, high-profile, pricey indications that suggest companies are willing to pay more. Bank of America Corp. last year agreed to a more than 40 percent premium in its $42 billion acquisition of FleetBoston Financial Corp.
Cingular Wireless’s decision to pay nearly $41 billion in cash to buy AT&T Wireless Services Inc. to create the nation’s largest mobile phone company involved a 50 percent premium, by some measures, although that deal involved an auction format, and aggressive bidding by Vodafone PLC helped drive up the final price.
Other highlights of this year’s M&A activity include two health care deals: The $63.2 billion cash-and-stock planned merger of drug makers Sanofi-Synthelabo and Aventis SA and UnitedHealth Group’s $4.9 billion cash-and-stock deal to acquire Oxford Health Plans Inc.
Even with its more cautious tone, the merger business is gathering momentum. Not even the increasing likelihood of higher interest rates or the continued volatility in the stock market is likely to stop it, Peterson said.
”Yes, higher rates are going to raise the cost of borrowing, but I don’t think it will be a significant deterrent to M&A. One of the reasons rates are going to get higher is because the economy is getting better, which is good for M&A,” he said. Put another way, ”if you look at 2001 and 2002 when rates were declining, the economy was struggling and so was M&A.”
Credit Suisse First Boston, Morgan Stanley, Citigroup were among the financial institutions that recently reported improvements in their investment banking business. The telecommunications, health care and financial service sectors are among those most frequently mentioned as candidates for M&A activity, but experts say deals in other sectors are also possible.
Of course, not all attempted mergers succeed. This year’s most notable failed deal was Comcast Corp.’s $54 billion offer for Walt Disney Co. The cable TV operator withdrew the bid, rejected by Disney as insufficient, as Comcast’s own investors worried that the deal would dilute the value of their shares. Still, Comcast chief executive Brian L. Roberts has said future acquisitions are a possibility, though no specifics have been offered.
Even though Comcast was unsuccessful, analysts were still encouraged by its bid.
”The fact that a company the size of Disney, even if it’s not at its best right now, was regarded as a plausible acquisition candidate by Comcast means there are other companies considering this kind of activity,” said Sam Schulman, a managing director at DeSilva& Phillips, a media investment banking firm. ”Even though it didn’t work out this time, Comcast was properly opportunistic.”