Commentaries

The guessing game ahead of Dell-Perot deal

In retrospect, it’s easy to say we could have guessed it:

Why didn’t some investors put 2+2 together and figure out that Perot Systems might be a target for Dell — before that is, Dell announced its $3.9 billion cash deal to buy Perot.

Looking back at Perot’s share performance, the stock has been building up momentum since July, despite warning of weak earnings in its August 4 quarterly report. The stock, which traded under $15 throughout the first half of the year, had built to $18 by last week. Perhaps this was early optimism about 2010 prospects. But the other explanation is some timely speculation that Perot was a logical target for fellow Texan company Dell.

Dell had made little secret of its plans to acquire computer services and software companies for months. Executives had dribbled out hints about what kind of targets it was after in the weeks and months leading up to the September 21 news.

Belatedly, it’s interesting to go back and read the dialogue at the Citigroup conference presentation on September 9th between Dell computer services chief Steve Schuckenbrock and a Citi analyst. It reads like the parlor game “20 Questions.” The following is an unedited transcript from ThomsonReuters SteetEvents:

Citi host: On the one hand, I’ve heard Dell executives say that they want to acquire a services company that’s large enough that you could reverse integrate your existing services business into whatever you acquire. At the same time, I think you’ve said repeatedly that you don’t want to acquire a body shop. You want to go to where the puck is going which is more remote resolution and services and software if you will. So how do you reconcile those two statements?

Schuckenbrock responds by describing what Dell thinks is wrong with big computer services companies before he comes around to describing the sorts of assets his company is after.

Green shoots or just talk in fertiliser M&A

There are signs of life returning to M&A in the potash sector — with market speculation that Potash Corp of Saskatchewan may bid for Germany’s K+S.

Canada’s Potash Corp — the world’s largest producer of the key ingredient in synthetic crop fertiliser — said last month that North American potash inventories had fallen in July, an indication that sales of potash had begun to move again after a seizing up of the market.

Some analysts reckon that the market is now reaching a bottom and that there will be a sharp rebound in 2010 as farmers start buying again.

K+S Chief Executive Norbert Steiner told Reuters in an interview on Tuesday that the world’s fourth-largest potash supplier saw an end to a decline in prices in Europe, but that demand remains depressed.

And K+S is not in the strongest position right now. The company is looking at a capital increase as one of a clutch of measures to bolster its balance sheet following its acquisition of Morton Salt from Dow Chemical.

With K+S trading at just over 35 euros/share compared with a price of nearly 84 euros/share a year ago, it is probably time for Potash Corp to at least take a look.

There is also renewed speculation that Potash Corp itself could be taken over by a mining company.

Cash M&A still lifeless

Bond sales are at a record, equity markets are at year-highs, private equity firms are sitting on huge cash piles — Blackstone alone has $29 billion — and banks are lending to each other again.

The ingredients should all be there for a resurgence of cash-driven mergers and acquisitions. But instead, the market is in hibernation.

So far the value of all M&A deals completed this year totals $990 billion. You have to go back to 2003 — when the total for the year was $1.23 trillion — to find a figure this low, according to Thomson Reuters data.

Of this, some $364 billion — just 37 percent — were cash deals, marking a dramatic shift in the mix of recent years when cash has dominated.

The main spanner in the works is the still dire state of banks’ balance sheets and the crippled syndicated loan market. This has kept a tight lid on cash bids of any size, with the mega merger or takeover a distant memory.

Most banks are doing all they can to shrink their balance sheets, guard against problem exposures and to lend to their best clients. As a result, global syndicated loan volumes hit their lowest monthly volume since 1993 in July.

True, corporate bond issuance is booming and companies are raising equity, but this is not going to be enough to fill the void. And even if companies are confident of being able to fund their purchases with bonds, they first need to find a bank to give them a bridge loan.

Morgan Stanley keeps Goldman from top M&A slot

Despite top billing for M&A involving European companies as well as Asia-Pacific and Japanese corporates, Goldman is not top of the league tables for global M&A for the year to date.

Instead it is long-time rival Morgan Stanley leading the pack, capitalising on a sizeable advantage in deals involving U.S. companies. Goldman is in second place in the worldwide ranking and JP Morgan third.

While the usual suspects are top of the tables, the big banks aren’t having it all their own way. Evercore Partners stands in 5th position for advising on deals with a U.S. flavour, behind Morgan Stanley, Goldman, JP Morgan and Citi.

But with five months still to go and M&A mandates scarcer than before, there is bound to be plenty of scrapping for top slot before 2009 is done.

Friends will find Pac-Man out of fashion

The 1980s revival continues. Music fans have been flocking to see the Human League and Spandau Ballet on their reunion tours. Now M&A aficionados can savour their own mini revival. Yes, it’s the return of the Pac-Man bid. Two mid-sized British insurers, Friends Provident and Resolution have revived this gambit, named after a mind-bogglingly dull computer game where the objective is to eat your pursuers rather than be eaten yourself. In M&A, this involves the target of a bid approach (in this case, Friends) turning on the bidder and launching an offer itself. In the case of Resolution there was a certain logic in so doing. Resolution is effectively a cash shell company, which has opaque governance. Its nil premium share for share approach offered little to Friends other than the chance to hand over 10 percent of the combined company’s profits to Resolution’s management. The proposed nil premium counterbid made little sense (other than to eliminate the 10 percent profit share). But it did at least tease out a slightly more generous bid proposal from Resolution. Pac-Man defences are rare in M&A — and for good reason. They’re wholly unconvincing. If you get a bid for your company, and think that the combination has merit, squabbling over who bids for whom seems to miss the point. At worst it smacks of management self interest. This is not the only reason there have been very few Pac-Man defences. The bigger problem is that they are uniformly unsuccessful. The target never actually gets to gobble up the predator. It is 10 years since Elf Aquitaine’s desperate  attempt to see off an ultimately successful bid by fellow French oil major Total. The same year, British regional brewer Marston’s also used the defence against a bid from Wolverhampton and Dudley Breweries. It too failed. That doesn’t stop it from rearing its ugly head from time to time. Pac-Man defences were raised as a possibility for Rio Tinto  to turn the tables on BHP Billiton and more recently as a means for Anglo American to round on Xstrata. But generally that’s all it is: talk. The Resolution-Friends situation is an unusual one. Resolution is a cash company that is desperate to do a deal, while Friends rejected a 150 pence per share bid from J.C. Flowers last year. There are particular reasons they have ended up in a sort of death embrace. So while the Spandaus may be back in favour, the Pac-Man bid is likely to remain consigned to the archive.

Bankruptcy-related M&A at 5-year high – more to come?

This week’s Thomson Reuters Investment Banking Scorecard shows bankruptcy-related M&A at a five year high.

There were five bankruptcy-related M&A deals announced during the week, including the acquisition of venture-backed public company Nanogen by French investment holding company Financiere Elitech for $25.7 million. 

So far this year there have been 173 bankruptcy-related deals, the highest level since the same period of 2004 when there were 202.

from Alexander Smith:

Is Jefferies right to be bullish on M&A in AM?

A bull(ish) note from growing investment banking group Jefferies Putnam Lovell predicting "a steady flow of M&A activity in the global asset management industry" for the second half of 2009.

Jefferies is basing its view on the following factors:

• divestitures by larger financial groups shoring up their capital base 
• pure-play asset managers looking to bulk up
• private equity firms drawn not least by lower capital requirements

And the firm is putting its money where its mouth is. It has recently been hiring scores of senior bankers from rival firms as it seeks to build itself a major presence.

This hasn't been without its problems. UBS filed a claim against Jefferies after the mid-sized investment bank lured away nearly three dozen of the Swiss bank's healthcare bankers.

Jefferies is pinning part of its confidence on a wider "relief that economies, while unsteady, are coming out of the crisis toward recovery".

Perhaps its prediction of a radical reshaping of the asset management industry reflects some of its own hopes for a redrawing of the investment banking landscape.