The Great Debate UK
Conventional wisdom has it that bulging corporate cash balances will bring a spate of deal-making. Yet many companies announcing deals of late have gotten an old-fashioned ass-whupping from shareholders. That reflects a mood in which cash, caution and skepticism dominate, making expectations of an M&A boom look overdone.
Not that investors should be jumping for joy. Most of August's big deals -- from Intel's $7.7 billion deal for security software group McAfee to BHP Billiton's $39 billion hostile bid for Canadian fertilizer maker Potash Corp -- are fraught with risk and don't offer the cost-cutting opportunities investors usually prize.
Even so, some of the negative market reactions seem to have gone too far. Take Intel. The company is paying a premium of $2.75 billion over McAfee's market value before the deal was announced. Yet Intel's value, even after adjusting for the decline in Nasdaq stocks since then, is off some $3.3 billion. McAfee may be a strategic stretch for the chipmaker, but it's hard to see how Intel's value will suffer beyond what it is paying to gain control.
Hewlett-Packard is in a similar boat. The computer group outbid Dell for 3PAR, a data storage business, on Monday, sending its own shares tumbling. Dell has since offered more to keep its deal to buy 3PAR on track. But even accounting for the Nasdaq's slide, HP is still worth about $1.7 billion less than before its now-fizzled bid for 3PAR -- more than the value of the entire deal that it now probably won't be doing.
Imagine a world where bankers are paid according to their actual efforts. A judge in Australia has brought that fantasy a little closer, by denying JPMorgan A$31 million ($28.6 million) of fees it claimed for defending a company from a takeover that turned into a bidding war. But the implied logic -- that advisers should get paid for what they did, not for what eventually happened -- is fuzzy.
Granted, it is hard to argue that the eventual A$1.3 billion purchase price for Consolidated Minerals, JPMorgan's client, was entirely the result of the bank's labors. Rising metal prices and some exuberant competing bidders played their part too.
LONDON, April 23 (Reuters) – Volumes may be down, but there are green shoots appearing in the M&A market after the frozen winter of financial distress.
This doesn’t mean a return to the boom years of a few years ago. It could take years for deal values to reach the dizzy heights of the second quarter of 2007, given falls in asset prices. But the number of deals is recovering fast. This fell off a cliff in Q1 of 2009 and at just over 8,000 deals was the lowest global tally since Q3 2004.
The week starting March 29 was the busiest of the year in terms of deals announced, with 821 transactions, and the 5th busiest since Sept. 2008, according to Thomson Reuters data.
There are still some complications (the disappearance of loan-funding, equity market volatility to name just two), but investors seem to be back on the hunt for bargains.
M&A deals may tend to be pretty hit and miss (indeed the failure rate is high) but historically the best returns from deals have been achieved on those struck during economic downturns, when activity is low.
True, M&A has been fuelled so far this year by a spate of large deals in the pharmaceuticals sector, an area that has been least affected by the crunch, with healthcare accounting for 27 percent of the total of $472 billion of announced deals during Q1. Pfizer’s <PFE.N> $68 billion acquisition of Wyeth <WYE.N> and Merck’s <MRK.N> $41 billion takeover of Schering-Plough <SGP.N> were the blockbusters.
But this was only just ahead of the distressed financials sector at 25 percent. And it is this area of activity which will grab a significant share of deals (by volume if not by value) as banks, insurers and fund management companies rejig their portfolios and vulture investors pick off the walking wounded.
The restructurings resulting from the meltdown in financial services are just getting underway. Look at the businesses UBS <UBSN.VX> is selling, Barclays’ <BARC.L> disposal of iShares, or indeed the auctions of Citigroup <C.N> and Royal Bank of Scotland <RBS.L> units in Asia.
Banking groups are under pressure to offload non-core businesses to strengthen weakened balance sheets and therefore are less sensitive to value. Add the assets which governments will have to repackage or offload once they have feel confident they have stabilised the sector and the deal pipeline starts to look positively healthy.
No wonder some investment bankers — especially those in boutiques and which thus have no conflicts with mainstream financial businesses — are rubbing their hands.
The main constraint on buyers (other than those lucky or sensible enough to still be sitting on cash) is obtaining financing. It is possible for companies to raise money for deals that seem to investors to make strategic sense. Roche <ROG.VX> of Switzerland, for instance, tapped the bond markets for a whopping $39 billion to fund its Genentech buy-out.
But stock market investors aren’t flush with cash and are wary of giving companies a free hand. UK’s Pearson <PSON.L> recently had to pull a small share issue that was designed to give it a cash pile from which to make opportunistic acquisitions. Meanwhile, it is still difficult to obtain loan finance from banks, and the bond markets are only really available to larger companies.
Even so, with debt-strapped companies being forced to sell off assets to meet covenants and prices relatively low, there should be plenty of action this year.
– At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.
(Edited by David Evans)