Global Trend

The Incredible Merger Surge

According to numerous sources ranging from the New York Times and Reuters to Fortune magazine, one clear sign of renewed economic health in this country is the recent boom in mergers and acquisitions. Even the perpetually gloomy takeover lawyer, Martin Lipton, who once declared the virtual demise of M&A activity, recently announced that, we are in a burgeoning mergers and acquisitions boom.

It will surprise many to learn that December 2004, was the busiest month in M&A history, totaling $283.7 billion in activity and beating the record set in 1999 during the height of the dot-com bubble. Sprint agreed to buy Nextel for $35 billion; Johnson & Johnson acquired Guidant for $25 billion; Symantec put up $13.5 billion for Veritas; and Oracle bought PeopleSoft for $10.3 billion. According to an article in the January 2, 2005, issue of the New York Times, deals in 2004 were up 50 percent over 2003, which represents the largest yearly increase since 1998.

Why is this happening now in particular?

The short answer is: Confidence. Executives know the economy is doing well and new accounting and corporate governance requirements give them additional confidence in corporations. Theyre putting the scandals behind them and getting ready for boom times to come.

In addition, interest rates and inflation are both low, corporate profits are high, and corporations, having increased productivity to historic levels and postponed some hiring and capital expenditure for a time, are sitting on mountains of cash. Some harbingers of the 2005 M&A boom came in early 2004 when J.P. Morgan Chase bought Bank One for $58 billion, and Cingular Wireless bought AT&T Wireless for $41 billion. But as the election approached, the pace slowed, with September and October being among the slowest in history.

Now with the election behind us and the stock market on a roll, all the momentum returned ? and then some. Kmart was in the starting gate with $11 billion in hand to buy Sears. A stampede of offers followed to tally up an amazing $357 billion in four dozen deals in a mere three-month period from November through January, according to a February 7, 2005, article in Fortune.

The overall number of deals rose eight percent to 8,313 last year, up from 7,702 in 2003. The dollar value surged 46 percent to $833 billion, up from $570 billion in 2003, according to an article in the February 7, 2005, issue of the Boston Globe.

Whats most significant to us here at Trends is the fact that the equity markets, which usually punish such activities with lower prices, appear to be giving the mergers a thumbs up with rising stock prices. After the Sears deal was announced, Kmart stock rose more than 20 percent in the first hours of trading. Several years ago, this would not likely have happened, owing to traditional fears investors have had that the deals are overpriced or that integrating the two companies will cause problems.

Another sign of this new confidence is the fact that many of the deals were made for stock, not cash. Traditionally companies have wanted cash in hand in these sales, because stock price may be vulnerable. The fact that many companies have accepted stock means that they believe, like the equity markets themselves, that stock prices are heading up.

As highlighted in a February 6, 2005, article in The San Francisco Chronicle, with a total of more than 10,000 mergers and acquisitions worth more than $770 billion in 2004, you can expect 2005 to be a landmark year for this kind of activity.

In light of these compelling trends, we offer seven forecasts for your consideration:

First, Silicon Valley will soon become the hottest area for corporate mergers and acquisitions. Because the info tech field is naturally so fragmented, it is an ideal breeding ground for M&A deals. The fear about these deals has always been that a hostile takeover could cause the talent to flee from a knowledge-based company, gutting its key assets. But Oracles success in acquiring PeopleSoft, after a long battle, has helped put this fear aside. Its shares have gone up almost four percent since the announcement.

Second, look for more hostile deals to come on line as the M&A boom gains momentum. While Comcast ultimately failed in its $54.1 billion offer to buy Disney, there are other uninvited bids in the wings, and we here at Trends will be keeping an eye on them for you. In fact, many companies, at their shareholders insistence, have dismantled takeover defenses during the past two years, while threatening proxy fights to remove any boards of directors that reject attractive takeover bids. This should help encourage more hostile takeover offers in the near future.

Third, as U. S. M&A activity heats up, look for the Canadian markets to follow suit. Adolph Coors and Canadas premier brewer, Molson Inc. effected a $4 billion merger a few weeks ago, according to Canadas National Post. In addition, watch as Canadian companies start acquiring businesses overseas owing to the strong Canadian dollar trading at a 12-year high. On the other side of this coin, expect European and Japanese companies to begin taking over more American companies, owing to the attractiveness of U.S. firms and the weak dollar. The relative weakness of the dollar may, on the other hand, prevent some U.S. companies from acquiring abroad.

Fourth, if 2005 pans out as experts expect it to, we may well exceed the record levels of M&A transactions seen in 1999, when $1.5 trillion in such deals were inked. As this happens, merger-mania will spread throughout all business sectors. But expect more consolidation in the telecommunications field in particular.

Fifth, watch the biotech field closely as that sector matures. There are a number of companies that now have large amounts of cash and high stock valuations to play with. Pit this against the many smaller companies that have ground-breaking biotech patents, and you have a natural breeding ground for takeovers.

Sixth, 2005 will see a healthier environment for IPOs than we have had lately, but the acquisition model is likely to remain the “exit strategy of choice” for entrepreneurial startups. This will be part of an overall phenomenon resulting from the flow of institutional money into venture funding in recent years that has resulted in technology sectors crowded with competitors. And at this point, watch for consolidation as stronger companies "roll up" their competitors to lay their claims on an emerging market.

Seventh, dont expect the long-term reality in this cycle to be different than those in the past. As always, the early deals will create the most value and the acquirers, as well as the acquirees will benefit. However, history always repeats itself and human nature never changes. As the cycle matures, earnings multiples will increase and well inevitably see many enormous value-destroying deals like HP-and-Compaq, AOL-and-Time Warner, or MCI-and-WorldCom. Stay tuned!

References List :
1. The New York Times, January 2, 2005, “Wall Streets Designs on 05? A Boom in Merger Activity,” by Andrew Ross Sorkin. ⓒ Copyright 2005 by The New York Times Company. All rights reserved.2. ibid.3. Fortune, February 7, 2005, “The Urge to Merge,” by Shawn Tully. ⓒ Copyright 2005 by Time Warner, Inc. All rights reserved.4. The Boston Globe, February 7, 2005, “Best Sellers; Merger Activity at Full Tilt, Even Before Gillette,” by Robert Weisman. ⓒ Copyright 2005 by The New York Times Company, Inc. All rights reserved.5. The San Francisco Chronicle, February 6, 2005, “Takeover Bankwagon Keeps Rolling,” by Jenny Strasburg. ⓒ Copyright 2005 by Hearst Communications, Inc.6. National Post, February 7, 2005, “Merger Market Heats Up,” by Scott Anderson. ⓒ Copyright 2005 by CanWest Publications.