Commentaries

Where cash is not yet king

In deal-making, the appeal of cash is obvious. Cash offers a cleaner exit for investors, particularly foreign ones. It has a value that will not fluctuate the way that stock prices can between when a deal is announced and when it closes.

For companies sitting on large piles of cash, using some of the money for deals makes sense given the low-yielding alternatives.

And a number of American acquirers are stumping up and putting cash on the barrel. Abbott Laboratories said today that it would spend 4.5 billion euros in cash ($6.6 billion) in cash for the drug unit of Solvay of Belgium. Last week, Dell announced that it would spend $3.9 billion in cash for Perot Systems. (Abbott will be left with more than $2 billion in cash on its balance sheet, while Dell will have $9 billion.)

Yet cash accounts for a smaller slice of the M&A universe than it did pre-financial crisis. Cash-only deals by American acquirers account for only 20.3 percent of total merger volume so far this year, according to Thomson Reuters data. That’s 803 transactions representing $93 billion worth of deals. Compared that all of 2007, when 1,919 all-cash transactions accounted for 54.5 percent of total dollar deal volume in the United States – or $796 billion worth of deals.

Worldwide, the story is similar. All-cash deals represented just 27.4 percent, or $394 billion, of total M&A, compared with 45.8 percent, or $1.5 trillion worth of total M&A, in the same period in 2007, according to Thomson Reuters data.

Of course, 2007 was –until that August — a year of gigantic buyouts by private-equity firms using borrowed cash. Leveraged buyouts on that scale are not going to return for some time, if they ever do.

Still, the use of cash in at least some recent prominent deals is an encouraging sign. It shows that companies are moving well past the paralysis caused by last year’s financial turmoil and recession and putting money to use in making strategic investments. Increased capital spending and hiring may not be far behind.

Dell shows discipline in opting for Perot

– Eric Auchard is a Reuters columnist. The opinions expressed are his own –    By Eric Auchard

LONDON, Sept 21 (Reuters) – Dell Inc has made a solid move into computer services by buying Perot Systems, even if the hefty price Dell is paying is hard to justify on Perot’s standalone prospects alone. 

And the price looks very rich indeed.  Dell is spending nearly $4 billion in cash — a premium of 68 percent to Perot stock’s recent close — to buy a slow-growing U.S. computer services firm focused on health care and government clients.    That’s 1.4 times Perot’s expected 2010 sales, or roughly two times more than rival Hewlett-Packard paid when it acquired EDS in a $13.2 billion deal last year.

But the Perot deal is best understood as arming Dell with a sales force to push its broad computer hardware lines and expanding software and services offerings out to healthcare and government customers. The acquisition lets Dell neatly expand into these markets without indulging in mega-dealmaking of the sort it has no history doing. And Dell will still be left with $9 billion in cash for any additional deals.

Acquiring Perot’s Web hosting and remote services businesses fills a missing link in Dell’s strategy to deliver software-based services remotely rather than more costly labor-intensive ones.    Dell’s current services businesses generate $5.7 billion a year, two-thirds of which is technical support for Dell hardware clients. Of the remaining one-third of Dell’s services business, most is made up of managed network services, and the stub is for consulting.    These are areas where Perot gives Dell a leg up. In return, Dell provides a pipeline of business with global customers that Perot is only starting to try to tap.    Perot Systems represents a big bet by Dell on the growth of the health care information technology business, which produces half of Perot revenues, and government work, roughly another 20 percent or so of sales. These are growth markets, however the debate over President Barack Obama’s national health care plan ends up.    And for a company founded by Ross Perot Sr. — a former U.S. presidential candidate known for his strong views on job losses to Mexico — Perot Systems has increasingly had a global focus.    Perot has been investing heavily in India, its biggest employee base outside the United States, which still accounts for 87 percent of its business, and more recently in China, where it has won promising business contracts. (Perot Sr. controls a quarter of the company’s shares and stands to take away more than $1 billion from Dell’s offer, while his son, Ross Jr., now serves as active chairman.)    The short term is not as promising: Perot sales are poised to decline 9 percent in 2009 over last year, while profits remain flat. But fortunes are expected to rebound in 2010, when analysts expect 9 percent growth in sales and profit.    Buoyed by health care reforms, electronic health records and other moves to use technology to wring efficiencies out of government and commercial health organizations, Dell says it sees plenty of growth potential.    Dell should be congratulated for avoiding many of the integration headaches of buying a broader-based computer services companies, many of which remain weighed down by huge staff headcounts in the face of low-cost competition from offshore services firms. I wrote in July of Dell’s wider services strategy in a column entitled ”A brutal logic to Dell’s reinvention.”    Shortly after acquiring EDS, HP set in motion plans to cut 24,600 employees, or more staff than Perot Systems employs across its whole company. Acquiring EDS has diminished HP’s ability to do new deals for the time being.    Dell can also find ways of wringing further costs from Perot, but the deal is more about expansion than simple merger synergies.    Most important, buying Perot keeps Dell’s powder dry for further acquisitions to fulfil its stated strategy of expanding into services and software makers from its base in computer hardware. It can pursue other mid-sized and smaller deals and have cash left in the bank.

– At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –

For previous columns, go to http://blogs.reuters.com/eric-auchard/

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.

Xstrata waiting plays into Anglo’s hands

    Mick Davis is sticking to his guns over his proposal for a nil-premium merger between Xstrata and Anglo American. And well he might. The gap between the two mega-miners in terms of market capitalisation is tantalisingly close to zero.     But Davis should not think that this means a prolonged bear hug is going to persuade them to accept the miner’s proposal.     Davis approached Anglo when the market caps of the two companies had almost converged, following a rise in Xstrata’s share price and a fall in Anglo’s. Following the offer, the gap widened in anticipation of a premium from Xstrata or a white knight bid from another mining group. So far neither has materialised and the gap has closed again.     Now Anglo and Xstrata have both reported first-half earnings, Anglo, valued at 25.6 billion pounds ($43.4 billion), is trading at a premium of roughly 5 percent to its antagonist.     Xstrata thinks its offer to split the $1 billion of merger savings it believes it can extract down the middle is fair because (whisper it softly) Anglo is poorly managed. Of course Davis can’t say this openly because the deal is “friendly” but the focus on efficiencies and savings is designed to make the argument for him. Meanwhile, Anglo’s riposte is to stress its own cost-cutting prowess.     It told investors that it expected to be ahead of schedule on its plan to extract $2 billion of stand-alone savings by 2011. Efficient, see?     Moreover, Anglo is arguing that Xstrata has timed its pounce at a moment when two important subsidiaries — Anglo Platinum and De Beers — are cyclically depressed. These two entities are collectively worth an estimated $15 billion, more than a quarter of Anglo’s $58 billion enterprise value. Xstrata’s focus on coal — where sales have surged because of Chinese demand — has conversely helped inflate its value.     Davis recognises the pivotal role that Anglo’s newly-appointed chairman John Parker will have in deciding how this battle plays out, pointing out that Parker needs time to look at the business he is inheriting before making any move.     Anglo’s shareholders may not be pushing Parker to invite Davis into immediate talks, but they will want to know how easy it will be to fix these assets, whether their value can be pushed up substantially, and whether the group has the management to deliver this.     If Parker can’t come up with a convincing answer, that may again raise questions about Anglo’s future as a standalone business. At that point, Davis may have another bite at the cherry.     It is significant that Parker hasn’t forced Davis to “put up or shut up” in UK bid parlance and either make a bid or push off for six months. Perhaps he sees value in having Xstrata as an option to get Anglo’s chief executive Cynthia Carroll working her socks off to turn Anglo round.

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.

July: It rained, the deals didn’t

With stock markets on the rise and some signs of economies steadying, if not recovering, investment bankers have recently sounded more optimistic about the prospect for deal-making for the second half of the year.

This month? Not so good.

July, with just $96 billion in announced deals around the globe, is the first month to have less than $100 billion in worldwide M&A since September 2004, reports Thomson Reuters Deal Intelligence. No deal was more than $5 billion, the first time that has happened in a month in nearly six years. (The biggest announced merger was in Japan, the $4.4 billion acquisition of Nipponkoa Insurance by Sompo Japan Insurance. The biggest U.S. acquisition was Sanofi-Aventis’ $4 billion offer for Merial.)

This August – especially after two consecutive summers of financial crisis – is certain to be slow as well as Wall Street and other financial centers go on vacation. Any pickup in M&A activity in the second half will have to start with a flurry in September.

For the entire first half, worldwide M&A totaled $1.1 trillion, a decline of 43 percent from the same period in 2008. More details from the Thomson Reuters data can be found in this post on DealZone.

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 MediaFile:

Data Domain, EMC’s deal that nearly got away: Eric Auchard

 -- Eric Auchard is a Reuters columnist. The opinions expressed are his own -- By Eric Auchard

LONDON, July 10 (Reuters) - The quickest way to attract a marriage proposal is to draw the attentions of a rival suitor.

When Data Domain <DDUP.O> agreed terms with fellow data storage company Network Appliance <NTAP.O> it concentrated minds at EMC <EMC.N>.

The upshot is that EMC is now paying an eye-watering six times sales for Data Domain, one-third more than NetApp first proposed to pay.

EMC could not bear to simply stand and watch. Data Domain has technology that threatens EMC's business model. Its products reduce demand for existing data storage hardware by as much as 20 times.

The winning bid is nearly double Data's price before the Network deal emerged six weeks ago. It has emerged that EMC had talked to Data but never made a formal offer. This now looks distinctly careless.

It's clear that EMC could have won Data Domain for significantly less, and a glance at the technology shows how badly it needed the purchase. EMC may be the market leader in data storage. But its software and operating system is the key to its success, and Data's products make existing systems much more efficient.

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.