Let's Make a Deal
Let's Make a Deal
By Will Swarts
December 14, 2005
MUCH TO THE DELIGHT of Wall Street investment bankers, not to mention the luxury retailers that cater to them at bonus time, mergers and acquisitions are back. While the final tally won't be available for weeks, U.S. M&A activity in 2005 has already surpassed $1 trillion for the first time since 2000. The 30% year-over-year improvement in the value of transactions is a good sign for the overall economy and a great sign for the several sectors that are seeing the most action, especially telecommunications and technology.
With 8,489 transactions worth about $1.1 trillion announced as of Monday, M&A activity has handily topped last year's total, according to Richard Peterson, chief market strategist at Thomson Financial, a New York-based provider of financial data. "That's over 140 deals a week, 20 deals a day, nearly a deal an hour," he says. There were 8,454 deals worth $824 billion in 2004. Big names have headlined mergers and acquisitions this year. Telecom giants SBC and AT&T began negotiations in January that culminated in a $16 billion agreement approved in October. The combined company adopted the AT&T (T: 24.87, -0.15, -0.6%) name. Software maker Oracle (ORCL: 12.81, -0.02, -0.2%) accounted for 13 deals alone in 2005, including the $5.8 billion purchase of Siebel Systems (SEBL: 10.53, +0.01, +0.1%) announced in September. Oracle closed its acrimonious $10.3 billion acquisition of PeopleSoft in January.
No end appears in sight. Early last week Boston Scientific (BSX: 25.30, -0.30, -1.2%) made a $25 billion bid for Guidant (GDT: 66.82, -0.48, -0.7%), trumping Johnson & Johnson's (JNJ: 60.11, -0.14, -0.2%) $22 billion offer for the medical-device maker. And on Thursday Alltel (AT: 64.81, +0.20, +0.3%) announced that it will spin off its fixed-line unit to Valor Communications (VCG: 12.36, +0.06, +0.5%) in a transaction valued at $9.1 billion. Though it might not happen before year's end, Verizon Communications (VZ: 30.54, -0.18, -0.6%) recently disclosed that it wants to sell off its Yellow Pages business. Some analysts predict that Verizon could fetch as much as $17 billion.
All the activity has fattened Wall Street coffers. Lehman Brothers (LEH: 129.05, +0.55, +0.4%) started the parade of prosperity on Monday, reporting a 41% year-over-year rise in its fiscal fourth-quarter profits, buoyed by merger advisory work and gains in its proprietary stock trading. Earnings for the three months ended Nov. 30 hit $823 million, or $2.76 a share, vs. $585 million, or $1.96 a share, a year earlier. Net revenue jumped 28% to $3.7 billion. Other big banks that are slated to report earnings later this week are expected to enjoy similar merger-linked lifts.
Investment bankers aren't the only people profiting from the M&A windfall. Investors in the acquired companies have done well too, considering the hefty premiums being paid, as have shareholders in some of the biggest Wall Street firms. Shares of Lehman are up 50%% year-to-date (through Tuesday) — the best performance of the group — Goldman Sachs (GS: 129.63, -2.01, -1.5%) has gained 26.5% and Merrill Lynch (MER: 68.28, -0.28, -0.4%), 14.7%.
While M&A revenue isn't the sole reason for the bumper share performance of many bulge-bracket banks, it certainly hasn't hurt, says Phil Guziec, an analyst at Morningstar, a mutual fund tracking service in Chicago.
"For a lot of the larger banks, M&A is a great business — very high-margin stuff, but not a huge mover of earnings," says Guziec. "One good quarter doesn't mean you can change your expectations for the next five years. It's a nice business to have, but it's just not proportional to the headline attention it gets, relative to the valuation of the firm." Guziec says proprietary stock and fixed-income trading and making markets are the main earnings drivers.
Still, says Howard Silverblatt, an analyst Standard & Poor's, the New York-based ratings agency, it's hard to quibble with the estimated $11 billion in merger fees that investment banks have collected so far this year. Silverblatt expects the M&A trend to continue paying dividends in 2006, and he's not alone in that assessment.
"Overall there's been a lot of [M&A] activity, and a lot of stuff that was announced earlier this year is now showing up as revenue. That's good," says David Hendler, a banking analyst with CreditSights, an independent capital structure research firm in New York. "In early 2006 and midyear, you'll start seeing revenues from deals that are now being announced."
Ken Marlin, managing partner of Marlin & Associates, a New York investment bank specializing in media mergers and acquisitions, says his sector has been particularly active. The acquisition of MySpace.com by News Corp. (NWS: 16.85, -0.07, -0.4%) is a prime example of the types of media deals struck this year. Marlin points to several factors that account for the resurgent merger climate.
"Buyers are willing to take more risks, and are willing to step up to higher purchase prices, and are more willing to close transactions," Marlin says. "They have more cash, and have access to more cash. Banks are more willing to lend, and at higher multiples."
Despite a rise in short-term interest rates, capital for deals is still cheap, and private equity firms are flush as institutional investors turn away from a lackluster stock market to seek higher returns. Combine that with a slew of cash-rich companies that need to do something with the money piling up in their coffers, and the result is a positive cycle that reflects well on the overall economy, says Steven Bernard, director of M&A market analysis at boutique investment bank Robert Baird in Milwaukee.
"We are pleasantly surprised at the dollar volume, which is already up 40% to 50% from last year, which is more than people expected a year ago," Bernard says. "The hope is that the valuations that are being paid now will draw more sellers to the market. A lot of firms missed the last [M&A] bull market, and then the bottom fell out of it. Now companies have improved profitability, and they are saying, 'We don't want to miss the window like we did the last time.'"
SmartMoney.com © 2005 SmartMoney. SmartMoney is a joint publishing venture of Dow Jones & Company, Inc. and Hearst SM Partnership. SmartMoney is a registered trademark. All Rights Reserved.