New York: US companies armed with more than half a trillion dollars in cash are stepping up efforts to take over rivals weakened by depressed stocks.
As many as 21% of the bids for American firms through 14 April were unsolicited, double the amount of a year earlier, and on pace to set a 20-year record, according to Bank of America Corp.analysis that counts deals by dollar value.
Cash-rich acquirers have the upper hand in a US merger market that’s shrunk by more than half to $267 billion (Rs10.7 trillion today) from 2007, deflated by the credit contraction that ended a record leveraged-buyout (LBO) boom. Two straight quarterly declines in the Standard and Poor’s 500 index mean bargain prices, and a 77% drop in LBOs eliminates one escape route from unsolicited bids.
“We are in the midst of a hostile market that is likely to grow more hostile,” said Cary Kochman, co-head of Americas mergers and acquisitions (M&A) at UBS AG.
Stock declines may attract bids for firms such as ValueClick Inc., Omnicare Inc., Tellabs Inc., and Tibco Software Inc., adding to a list that already includes Yahoo Inc. and Diebold Inc., said Sachin Shah, who tracks potential acquisitions at London-based ICAP Securities. “When the stocks of unique assets trade down, they are ripe for the picking,” said Scott Barshay, an M&A partner at Cravath, Swaine and Moore Llp. in New York. “Most of us don’t see those dynamics going away anytime soon.”
Cisco Systems Inc., the world’s biggest maker of computer-networking equipment, and Pfizer Inc., the biggest drug maker, each have more than $20 billion of cash or cash equivalents, and are best positioned to buy rivals, Shah said.
“Certain buyers are in a very strong position, have the ability to pursue transactions, and have access to capital,” said Michael Boublik, Morgan Stanley’s co-head of Americas M&A. “They may be interested in companies who aren’t quite ready to sell at current prices.”
The biggest US companies have more cash in this slowdown than the last one, in 2001 and 2002, when the end of the Internet boom halted a merger binge dominated by stock-for-stock deals. Non-financial firms in the S&P 500 have amassed $615.5 billion in cash, according to S&P data.
Companies held on to cash to avoid a repeat of 2001 when they were forced to shed jobs and shut plants, said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. Private equity firms have spent $40.9 billion in the US this year, compared with $181 billion in the same period last year.
Leveraged loans that fuelled record LBOs in 2006 and 2007 became scarce when investors stung by subprime mortgages losses shunned other forms of high-yield debt. Banks are still trying to shed around 200 billion of buyout loans.
The Bank of America study, based on data from Thomson Reuters Corp., dovetails with analysis by FactSet Research Systems Inc. FactSet found one-fourth of offers for US publicly traded companies in the first quarter were unsolicited, the biggest share since it started counting in 2004.
“We’re in front of our clients talking about their potential vulnerabilities in this environment,” said Stefan Selig, head of M&A at Bank of America. “The best defence is always a high stock price.” Omnicare, the provider of pharmacy services for US nursing homes, may be a takeover target because its share price dropped by more than half since 2006, said Charles Rhyee, an analyst with Oppenheimer Holdings Inc. “My suspicion is they wouldn’t want to sell,” Rhyee said. Andrew Brimmer, a spokesman for the company, declined to comment.
ValueClick, the second biggest US broker of online advertising, lost about one-third of its value in the past year. It may be vulnerable to a hostile bid from News Corp. or Viacom Inc. seeking to compete with Google Inc. or Microsoft Corp. for online advertisers, said Shah. Spokesman Gary Fuges declined to comment. Tellabs, the wireless equipment maker for phone companies, could get a bid from Nokia Oyj or Nortel Networks Corp., Shah said. Its shares have lost about half their value in the past 12 months. Spokeswoman Ariana Nikitas declined to comment.
Tibco, the maker of computer infrastructure software in Palo Alto, California, may be vulnerable, because it competes with much larger rivals, Shah said. Those include BEA Systems Inc., which agreed to be bought by Oracle Corp., and International Business Machines Corp. Tibco spokeswoman Holly Burkhart declined to comment.