M&A: Back with a Vengeance
By Steve Rosenbush
M&A: Back with a Vengeance
Deals in 2005 are likely to top $1 trillion. Ready cash, rapid technological change, and private funds make it unlikely we'll see any cooling soon
December 6th 2005. Dealmakers, it's time to pop the champagne corks a little early this year. It looks like the market for mergers and acquisitions will close out 2005 with its best performance in five years. With three weeks left to go, the value of U.S. M&A deals is likely to break the trillion-dollar mark for the first time since 2000. To date, there have been 8,115 announced deals worth a combined $948 billion, according to researcher Thomson Financial. That compares with 8,454 deals worth $824 billion in 2004.
Evidence of a resurgent M&A market is mounting daily. The deals are coming at a rapid-fire pace, across all sectors of the business world. The latest bombshell: On Dec. 5, Boston Scientific (BSX) bid $25 billion for medical-device maker Guidant (GDT), besting the current $22 billion offer from Johnson & Johnson (JNJ) (see BW Online, 12/05/05, "Boston Scientific Makes $25B Guidant Bid").
KEY SECTORS. Meanwhile, Verizon (VZ) is looking for buyers for its Yellow Pages business, which could fetch up to $17 billion (see BW Online, 12/06/05, "Yellow Fever, Courtesy of Verizon"). And British cable company NTL (NTLI) may buy wireless-phone marketing upstart Virgin Mobile (VGMHF) for $1.4 billion (see BW Online, 12/06/05, "Why NTL Likes Virgin").
It has been this way all year, starting last January when telecom giant SBC's (SBC) merger talks with AT&T (T) came into full view. The deal is now complete, and SBC has taken the AT&T name (see BW Online, 10/28/05, "It's All in a Name").
Other huge deals include Oracle's (ORCL) pending acquisition of Siebel Systems (SEBL) (see BW Online, 11/17/05, "Oracle Keeps on Making Deals"). Energy and health care have been active, and tech has been on fire. "Without question, the M&A market in the sectors that we follow, primarily related to media and tech, are the strongest we have seen since late '99, early 2000," says Ken Marlin, founder and managing partner of New York-based investment bank Marlin & Associates.
WHY THE RESURGENCE? In historic terms, 2005 won't set a record. The year 2000 saw an astonishing 11,044 deals, worth $1.7 trillion. And 1998 and 1999 were nearly as strong. But those years were anomalous, driven by deregulation and the birth of the Internet as we know and understand it today.
Still, the strength of the current market leads most analysts to believe the climate for consolidation and mergers is likely to remain strong for at least several years, investment bankers say. Plus, it's possible that 2006, and even 2007, could exceed the levels attained in 2005.
M&A activity plunged from 2001 through 2003, as the tech bubble burst, the markets reeled from the September 11 attacks, and overextended companies worked out their debt. Investors were left to lick their wounds. Banks all but stopped lending, and corporations focused on outdoing themselves by seeing which could be the most conservative.
ASIAN INTEREST. But after a long drought, the market is in a period of replenishment. Marlin says the psychology of buyers and sellers has changed. After several years of "looking inward," buyers are ready to take on more risk in search of opportunity and growth. In areas such as telecom and technology, fundamental changes are forcing giants such as News Corp. (NWS) to make huge investments in the Internet (see BW Online, 11/15/05, "Users Crowd Into MySpace"). And sellers are more motivated, now that prices are rising.
The financial environment has changed drastically since the tech bust, too. Several years of poor liquidity and massive debt have given way to a new era of double-digit corporate-earnings growth, low interest rates, and massive amounts of cash. The 375 companies that comprise the Standard & Poor's industrials achieved a record cash position of nearly $640 billion in November, according to S&P analyst Howard Silverblatt.
A lot of that money is going into M&A, he says. Moreover, large companies such as Oracle are using cash to buy back their stock, then using those shares as currency to acquire other companies. That makes M&A more palatable to investors, because the price appreciation isn't subject to taxes, Silverblatt adds.
The M&A market also draws support from a new generation of buyers. Corporations in China, India, and other burgeoning markets are playing a big role in M&A for the first time, and they're just getting started. That's more evidence that this M&A boom may have legs. Earlier this year, China energy giant CNOOC (CEO) tried to buy Unocal (UCL). It didn't work but the perception of Chinese capital has changed (see BW, 8/15/05, "What CNOOC Leaves Behind").
NO END IN SIGHT. Add in a third factor: Billions of dollars have accumulated in the coffers of private-equity firms. As good deals become scarcer, private-equity firms use their financial muscle to bid up prices. They're moving beyond their traditional hunting grounds of smaller prey in search of ever larger deals. And banks are allowing private-equity outfits to borrow more money against the equity in the companies they buy, creating the opportunity for more leverage.
Finally, long-anticipated technological revolutions such as broadband and wireless broadband are maturing. Buyers and sellers are in good financial shape, too. "I see no reason why the current boom should end any time soon," Marlin says. This wave may not be as big as the last one, but it's a good bet that M&A activity will keep rolling along into the New Year -- and beyond.
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