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M&A springs back to life

The market for mergers and acquisitions sprang back to life on Monday when 10 deals totalling more than $27bn were announced, with over half of their total value paid in cash.

After months of deal inactivity, Oracle agreed to buy Sun Microsystems for $7.4bn; GlaxoSmithKline paid $3.6bn for Stiefel Laboratories; and PepsiCo offered $6bn in cash and stock to buy out investors in its two biggest bottlers. Bankers said the deals signalled improving business confidence and market conditions for transactions, but cautioned that there was still a long way to go before the market could reach the levels of activity seen in the recent debt boom.

William Vereker, co-head of investment banking at Nomura, said: “Companies are taking advantage of an improvement in markets to execute on strategic transactions which have been in the pipeline. But confidence is still fragile and much will depend on how markets behave over the coming months before M&A volumes increase meaningfully.”

Others said it was encouraging to see deals being struck across several industry sectors. That contrasts with the first quarter, which was dominated by the pharmaceuticals industry – one of the few that is relatively stable and has strong cash flows. Pharmaceutical companies have also been forced to consolidate as they come under threat from patent expiries and generic rivals.

However, the value and volume of worldwide deals remain well below the levels seen during the recent M&A and debt boom. In the year to date, worldwide M&A is down a third from last year to $659.5bn. In the same period in 2007, global deals reached $1,424.3bn – the highest year-to-date total on record, according to Dealogic.

Wilhelm Schulz, co-head of European M&A at Citigroup, said: “Historically, M&A activity levels have been closely correlated to the state of the equity markets. While the recent equity capital market strength has certainly built board confidence and thereby contributed to increased M&A activity levels, structural barriers such as availability of credit, volatility levels and macro­economic uncertainty remain.”

Although companies are using cash to do deals, acquirers with strong credit ratings and cash flows, and which can demonstrate industrial rationale for a deal, are also managing to convince banks to lend.

Other companies are turning to the public bond markets as an alternative to costly short-term bank debt by tapping the bond market for long-dated, non-amortising debt. Roche, for example, financed its hostile offer for the 51 per cent of Genentech it did not own with cash, commercial paper, bonds and bank loans.

“This is further evidence of the trend of selective big-ticket M&A as strategic consolidators take advantage of the lower market valuations to strengthen their own business with synergistic deals,” Philip Noblet, a managing director in Bank of America/Merrill Lynch’s M&A group, said.

The deals did not excite equity markets, which fell on fears of economic weakness and troubled loans at Bank of America.

Источник: Financial Times

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