Merger mania may not be quite in full swing. But the pace of deal making is showing signs of rousing back to life after nearly a year.
Kraft Foods Inc.’s hostile bid for Cadbury Plc on Monday was only the latest potential blockbuster deal in recent days. In the last week, several multibillion-dollar deals have been announced, including those involving prominent companies such as Walt Disney Co. and eBay Inc.
Yet many of the bankers and lawyers who piece these mergers together, well versed in reading economic tea leaves for signs of an industry’s health, caution that deal making is likely to rise only in fits and starts for now.
“The clouds have broken a little bit, and there’s a little bit of sunshine,” said Douglas L. Braunstein, the head of investment banking for JPMorgan Chase and Co. “But it’s too early to say the storm’s over.”
Deal activity remains far below the giddy heights of only a few years ago. About $1.32 trillion (Rs64.28 trillion) worth of deals have been announced this year through Monday, according to data from Thomson Reuters. That figure is down 37% from the same point last year and 56% from 2007. (It also includes deals that have yet to close.)
In fact, until last week, August shaped up to be the slowest month for deals since 1994, according to Thomson Reuters. Now, it is just the slowest month since last November.
Still, there was hope that Merger Monday—so called because of companies’ tendencies to announce deals at the beginning of the week—seemed to be back in full force last week. Its presence had largely disappeared since the onset of the financial crisis.
Since the beginning of the year, the conditions that foster deal making have largely improved. The stock markets have rallied, helping to establish a perceived floor for share prices. The broad economic recovery has inspired confidence in corporate boards that the worst is over.
Many of the announced deals through Monday, including Kraft’s offer, Disney’s $4 billion purchase of Marvel Entertainment Inc. and eBay’s sale of a majority stake in its Skype unit, also involved different types of activity, from hostile bids to corporate mergers to private equity transactions.
“We see this as the beginning of the next upturn,” said Roger C. Altman, chairman of Evercore Partners, the boutique investment bank. He added that in his view, upturns tended to last five-seven years, while downturns, like the one that began in the second half of 2007, last on average about two-three years.
And management teams have regained confidence in pursuing targets they have eyed for some time. That has even meant hostile bids, such as PepsiCo Inc.’s pursuit of its two largest North American bottlers, which the company completed last month.
For many buyers, Braunstein said, the fundamental question is not whether deal making is possible, but this: should I be doing something in this environment?
“It was just a matter of time before buyers returned,” said Boon Sim, Credit Suisse’s head of mergers and acquisitions for the Americas. “The general thinking seems to be, if you do not do something now, prices will be higher 12-18 months from now. So why wait?”
Just as crucial for deal making, banks have slowly become willing to open up their wallets to finance transactions for a broad variety of companies, beyond blue-chip acquirers such as Pfizer Inc. and Disney. Several merger advisers pointed to the acquisition of Skype and the sale of Procter and Gamble’s prescription drugs business to Warner Chilcott Plc as signs that bankers and other financiers were willing to back riskier deals, involving borrowed money from companies with less-than-sterling credit ratings.
Bankers and lawyers agree that the financing markets will most likely never return to the frothy heights of the credit boom in 2007, which enabled private equity firms to borrow liberally and often outbid corporate rivals. The ensuing financial fallout has left many companies with debt they are hard-pressed to pay, forcing some to seek bankruptcy protection.
But even the troubled deals of yesterday have led to opportunities for companies and private equity firms, which are snatching up targets out of Chapter 11.
©2009/The New York Times