Just when it seems as though the global merger boom can’t get any hotter, the temperature goes up another notch. What’s been extraordinary about last week’s slew of multi-billion dollar deals, however, has not been their size as much their price.
The offers by Canada’s Thomson for news group Reuters, Heidelberg Cement for Britain’s Hanson, Mylan for Merck’s generic drug division and Microsoft for internet advertising firm aQuantive have all been sky-high. This is a worrying sign for anyone concerned that the peak of the merger market might be near. It recalls the value-destructive deal-making of the dotcom boom.
In terms of volume, 2007 has already long punctured the ceiling set at the turn of the century. About $2.2 trillion (Rs90.2 lakh crore) of deals have been announced worldwide this year, according to Dealogic. That is almost 50% more than in 2000—although there are good reasons why activity should be higher now.
A wider range of businesses is involved, for one. And the globalization of financial markets has increased the scope for deal-making across the world. Credit is also abundant—and been harnessed by acquisition—hungry private equity buyers with huge war-chests to deploy. In the second half of last year, leveraged buyouts accounted for almost a quarter of all deals—despite tightening monetary policy. That may be because higher interest rates have been offset by falling risk premiums and looser loan conditions, leaving the cost of borrowing effectively unchanged. However, last week’s prices suggest that a step-change has occurred. Heidelberg’s £8bn (Rs64,000 crore) offer for Hanson was pitched at a 35% premium to its share price a month before the deal was announced. The premium in Thomson’s offer for Reuters was 46%. Microsoft’s offer for aQuantive trumped them both, at 85%. By contrast, average premiums peaked at 39% in 2000.
A breakingviews.com analysis of these four big deals suggests that they were value-destructive in that the premiums paid could not be justified by the synergies promised by the acquirers. In itself, this doesn’t mean the pace of mergers and acquisitions activity will end anytime soon. But it does suggest the boom has moved into bubble territory.