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A Big Year for Deals Turns Huge

February 2004

A Big Year for Deals Turns Huge

By Diane Hess
TheStreet.com Staff Reporter
2/11/2004 5:25 PM EST

With a $54 billion hostile bid by Comcast (CMSA:Nasdaq) for Disney (DIS:NYSE) now on the table, 2004 is shaping up to be the biggest year for mergers and acquisitions since the peak of the Internet bubble.The bounty was being felt in brokerage shares, which were almost uniformly higher Wednesday.

So far in 2004, proposed buyouts are valued at $165 billion, the second-highest level on record this early in a year, according to Thomson Financial. The amount was greater only in 2000, when it totaled $314 billion by Feb. 11. Even in the first six weeks of 1999, deals were valued at just $159 billion.

After a few of years of cutting costs, businesses have gained the confidence to look outward. "Low interest rates, higher equity prices, hefty cash levels and the expectation of better corporate profits are the ingredients for increased M&A activity," said Richard Peterson, an analyst at Thomson Financial.

While the recent deal flurry is reminiscent of the blizzard in 2000, there are reasons to believe it's different this time around. For one thing, the companies involved have been profitable or shown revenue growth.

In its latest quarter, cable operator Comcast earned $383 million, or 17 cents a share, compared with a loss of $51 million, or 3 cents, a year ago. Analysts were expecting 3 cents, according to First Call. Disney had quarterly net income of $688 million, or 33 cents a share, vs. $36 million, or 2 cents, in the year-ago period. The consensus called for 23 cents, based on First Call estimates.

"In the bubble, small companies with highflying share prices, such as AOL, tried to take advantage of that," said Ken Marlin, president of Marlin & Associates, an investment bank focused on media and technology. "The strategy was to create a high-growth Internet stock. It was a flawed assumption."

Over the past year, companies have gone after more logical targets. Among recent takeover proposals is a $59 billion merger between J.P. Morgan (JPM:NYSE) and Bank One (ONE:NYSE).

The J.P. Morgan announcement in January followed a $47 billion proposed deal between Bank of America (BAC:NYSE) and FleetBoston (FBF:NYSE) last October.

More recently, Rite Aid (RAD:NYSE) is reported to have put in a bid for J.C. Penney's (JCP:NYSE) Eckerd division. Both companies were profitable in their latest quarters.

"Seasoned managements are looking for clear similarities in terms of customer base," said Marlin.

Even Oracle's (ORCL:Nasdaq) $9.4 billion hostile bid for PeopleSoft (PSFT:Nasdaq) could make sense for that reason.

Comcast's proposed deal begs an obvious comparison to AOL's ill-fated acquisition of Time Warner, which was completed in January 2001. While Comcast's equity isn't as gassy as AOL's at the height of the bubble, its shares are still fetching about 108 times this year's earnings estimate of 29 cents a share, hardly a low multiple. Disney fetches 31 times 2004 earnings forecasts for 89 cents a share.

One analyst said the offer announced Wednesday is more similar to its previous takeover of AT&T's (T:NYSE) cable operations.

In 2001, "Comcast approached AT&T with a low bid, and the deal was ultimately done at a higher price," said Tom Burnett, president of Merger Insight, an affiliate of Wall Street Access. "I am not saying that is what is going to happen here. But that is the pattern."

All the action has meant a resurgence of high-margin advisory fees for the investment banks that put the deals together. Several stocks reflected that trend Wednesday, including Goldman Sachs (GS:NYSE), up $4.94, or 4.8%, to $107.12; Morgan Stanley (MWD:NYSE), up $2.88, or 5%, to $59.86; Lehman Brothers (LEH:NYSE), up $4.77, or 5.8%, to $86.70; and Bear Stearns (BSC:NYSE), up $4.04, or 4.8%, to $86.93.

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