M&A debt financing: R.I.P., or, like a phoenix, will it rise from the ashes to stalk companies again?

I think ‘phoenix’ is a better analogy than the term Vanity Fair used recently in their exposé of Goldman Sachs when it was labelled a ‘vampire’.  Both rise from the dead.  And there may be those who do believe that financial sponsors (venture capitalists, hedge funds and private equity firms) suck the very lifeblood from the companies they purchase.  But in terms of the rise of debt financing for M&A deals, since much of this has historically supported the purchase of strategic acquisitions by corporate buyers, I prefer the term ‘phoenix’.

Just as the phoenix rises from it own ashes after it has (been) burned, the markets have come back to life (see our reporting of this here in our article entitled ‘Has the M&A market returned?  Can we start harvesting the green shoots already?’).

What is still missing, however, are the huge amounts of debt-financed M&A, and this may be missing for a while yet.  The private equity and venture capital industries are still largely absent from the announced deal flow (notwithstanding the recent purchase by a venture capital group of 65% of Skype from eBay), as are highly leveraged corporate deals.  With the debts markets fundamentally changed from two years ago and earlier, this will take further time to change, but change it will.  The disappearance of junk-bond financing at the end of the 80’s was a temporary phenomenon and the creative genius of investment bankers will again be applied to the debt markets in the future, even if not immediately and while the structured debt market remains under a microscope in the halls of Westminster and Washington.

Note as well that corporate buyers have been able to access the debt markets.  Does this mean that acquisition war chests being filled?  In the US, over a third more investment grade debt has been issued this year than last year at this time, and in Europe the figure is closer to 40%.

Some of this WILL be spent on acquisitions, and well over $1 trillion has been raised in just those two markets alone.  That’s a large war chest, even if most of the debt is being used for other purposes such as the need to strengthen balance sheets for the core business after all the hits those same companies took in this recession.

Is this another ‘green shoot’?

M&A inflexion point: The turn to ‘up’ in activity

It’s dangerous calling a bottom to a market as you can be wrong and no one (and certainly not me) has a clear crystal ball, but doesn’t there certainly seem to be a marked turn in sentiment about the M&A market – and this is happening before everyone is ready to call the end to the recession or the stock market lows.  Disturbingly, I still talk to a number of economists who say we’re in a ‘fool’s rally’ or on the uptick in the first part of a ‘W’ cycle where we might see further lows before the economy really gets a sustained recovery – the so-called ‘double dip’.  Could the recent rise in M&A deals be the same?

Historically, the M&A markets have been driven largely by other factors, although still somewhat correlated to the overall economic cycle.   (It is important to remember that correlation is not necessarily causation).  Certainly there are parts of the M&A market that link closely to the economy:  one of these is the market for depressed companies (even those who declared bankruptcy or had gone into insolvency), and the M&A Research Centre at Cass Business School released a study of that market in June which did — correctly — indicate that the level of such deals does increase after a downturn.

As noted in another write-up here (see: Has the M&A market returned?  Green shoots turn into harvest time… ), the M&A market is showing strong signs of recovery, and not just in the aforementioned distressed deals.  Companies are more willing now to dust off the plans for restructuring and acquisition, whether in the confectionary (Kraft / Cadbury, and possibly other bidders), entertainment (Disney / Marvel), social networking (MySpace to buy iLike for an undisclosed amount) or oil field services industries (where Baker Hughes’ $5.5bn takeover of BJ Services is the largest oil services industry deal in more than a decade), and not just the pharmaceutical deals of earlier this year when the recovery appeared to many to be a one-industry upturn!

Note that some of these deals were likely to have been long in the making, and some may even be deals that were planned back in 2007 but then postponed when the market collapsed.  Kraft’s bid for Cadbury was most likely stimulated by Mars’ purchase of Wrigley in 2007 for $23 billion.  Disney has long been adding to it list of characters, and Spiderman and the The Hulk have existing strong franchises.  One can only imagine the new rides being planned now in Disneyland for Spiderman and the others.  And the Baker Hughes deal has its roots in a long-term consolidation of the energy extraction industries.

Suddenly there’s an urgency in the board room and in the executive suite:  will the general market recovery quickly raise the price of potential targets above the ‘bargain basement’ levels currently available?  Especially if the specific target has been wounded by the recession, especially financially and cannot launch as powerful a defence to remain independent.

This broader base – and now somewhat sustained – recovery does, in this writer’s opinion, represent the inflexion point when the M&A market turns up.  Do others see it the same?

This wave of M&A deals: Who will be made redundant now?

Strategic acquisitions are once again headline news with the announcement of a number of massive deals on both sides of the Atlantic (see our blog entry: ‘ Has the M&A market returned? Green shoots turn into harvest time…’).

Wait a few weeks or months, and the headlines will talk more about the people who will be (or are already) being made redundant from those deals. As naturally as dusk follows day and water flows downhill, the merger of two companies results in people being fired, plants and offices closed, product lines shut down or merged and one of the two CEOs (plus one of the two CFOs, HR heads, Senior VPs for IT, etc) taking ‘early retirement’ or departing ‘for personal reasons’ and later showing up at a lesser well-regarded competitor.

Is there anything you can do about this if you’re one of the people in a company where a merger has just been announced? Yes, there definitely is. There are actions you can take as you ask yourself the question: ‘What do I do now that my company’s being acquired?’

As reported on 2 September 2009 in The Times in a review of my new book just released in July (Surviving M&A: Make the most of your company being acquired),

‘The spectre of a merger is enough to send a chill down the spines of most employees — with good reason. Mergers always carry a risk of redundancies: on average, 10 to 15 per cent of employees across both organisations lose their jobs in a merger, sometimes as many as a third. Even those who keep their jobs are likely to be fearful of the change to the status quo.

‘In a book just published, Surviving M&A: Make the Most of Your Company Being Acquired by Scott Moeller, director of the M&A Research Centre at Cass Business School in London, explains how to improve your chances of keeping your job, based on 350 interviews with employees who have been through M&A deals. “The first question you need to ask yourself is: ‘Do you want to stay?’ ” Professor Moeller said. “A merger might be the best time to leave.”’

There are many steps you can take to stay, as discussed in that book, ranging from ‘showing off’ your (hopefully) excellent work (and going against the natural tendency to ‘stay low’ at a time like this), increasing your internal networking and even volunteering for the planning and transition teams.

If the M&A market has truly started growing again and if we really are therefore at the start of a new strong M&A wave, then many people will be faced with the need to ‘survive’ in a way that they hadn’t anticipated. Best to get started now with some planning, even if you feel your company isn’t at risk. Do you think most of the employees at Cadbury anticipated the need to plan an acquisition survival strategy in 2009? Or did Mavel’s employees expect that they’ll need superhuman skills to retain their jobs in 2010?

[Note: you can find a variation of this posting on my other blog, Surviving Mergers]

Deal success: 2009 better than 2008

A study the Cass Business School conducted for Towers Perrin and reported widely (see, for example, Reuters’ report on 10 September 2009, ‘Deal Talk — Rallying stock markets help accelerate M&A plans’) showed that firms that do M&A deals are more likely to outperform their industry peers (and the market overall) than firms that have held back on doing acquisitions.  This is consistent with an earlier study (released in June) that Towers Perrin sponsored and which focussed on the short-term market reaction to companies who were brave enough to do deals subsequent to the infamous Lehman bankruptcy weekend in September 2008.  Both studies looked at all deals over $100 million done by public companies.

As reported in the above 10 September 2009 Reuters article:  ‘Marco Boschetti, global head of M&A and restructuring at business consultancy firm Towers Perrin, said deals that closed in the second quarter of the year outperformed the market by 8.5 percent, compared to outperformance of 2 percent in the second quarter of 2008.  “What this is saying is that there is a lot of value in deals at the moment and if you can afford to close a transaction you should go for it,” he said.’

This continues to confirm that the inflexion point in M&A activity may have been reached already, which I will write about shortly.  Certainly if the word gets out that the market does reward firms that announce strategically defensible deals, even more deals should emerge from the planning stage to announcement and execution.

Has the M&A market returned? Can we start harvesting the green shoots already?

What a change a few months makes.  Everyone comes back from the summer holidays and the M&A market is once again alive and making front-page news.  Looks as if some people didn’t take their holidays this year:

  • US:  Disney spends $4bn to purchase Marvel Entertainment, home to the Incredible Hulk and Spiderman, their biggest purchase since Pixar Animation in 2006 for $7.4 billion.  eBay sells 65% of Skype for just over $2 billion to an investor group, and this was even a deal where the cash portion was 96% of the consideration with the venture capital industry putting up the money for the purchase.
  • Trans-Atlantic:  Kraft makes a bid for Cadbury.  Hershey hires J.P. Morgan to consider a ‘white knight’ counter bid for Cadbury.
  • Europe:  The mobile phone market in the UK sees Orange and T Mobile proposing a merger , and no one even suggests that this could have competition concerns when their combined market share would be over 30%!

What’s happened?  For anyone following the market closely, actually the market has never been dead.  Yes, there were many deals withdrawn (but we recently looked at this, and although there were high profile deals that may have been pulled, only 2% of deals actually were!).  Other deals were delayed (and it’s difficult to tell how many were postponed, but anecdotal evidence would indicate quite a few:  but at least postponement isn’t cancellation!).

Advisors were working on deals, and the pipeline is large with many CEOs waiting for the time to pounce.  These are often acquisitions that had been designed in their strategy departments (or in their own heads) over the past 18 months, but are only seeing the light of day now.

The demand for deals just doesn’t disappear anymore.  2008 saw a dearth of new deals but the first half of 2009 may ultimately be consider the low point: in 2009 in the US, the M&A market was 42% lower than the already depressed 2008. This period still had levels of deals (both in terms of numbers and value) that were way above the market lows earlier in this decade and many times greater than the peaks only 20 years ago.  Fundamentally, companies need to do corporate combinations at all levels in order to compete in today’s global economy.

Even in a recession this need doesn’t disappear.  Many companies and some industries need to restructure.  And one company’s acquisition is another company’s sale of a division – as the seller needs to raise money for the core divisions, or, as in the case of eBay above, a refocus on the core).

Of course, the M&A market is highly reflective of the general economy, and for particular companies and industries, the general conditions for that industry.  There is a ‘halo effect’ from the overall economy, because the confidence to do a major acquisition declines as overall confidence levels decline with company sales and the malaise in the world in general (as reflected in the news everyone hears on the television, in the press and when talking to friends, neighbours, customers and suppliers).  This means, of course, that the M&A market will recover – as we’re seeing – as the economy recovers.  Our analysis at Cass Business School shows a lag of a quarter or two in this increase, so it is to be expected that we’re seeing more than just ‘green shoots’.  In the M&A market, ‘green shoots’ are the advisors’ strong pipelines, but they can ‘harvest’ the deals when they start happening with a pace we’ve only recently seen again.

Debt financing will also reappear, as will be the subject of a future blog entry.

We hear about ‘green shoots’ in the financial press all the time these days.  I believe that the M&A market now beyond that phase?  In fact, do you ever really have ‘green shoots’ at all in M&A (except for the advisors), or does the M&A market spring to life quickly like weeds, where it seems as if the dandelions come up within a day or two after you’ve mown the lawn?

‘Green shoots’ in Global M&A

It seems that you can’t read the business new these days without hearing about the ‘green shoots’ in the economy and whether the recession (or depression, if you happen to be someone losing your job) is going to be over soon.  Back in the springtime, Federal Reserve Board Chairman Paul Bernanke started seeing these ‘green shoots’, and President Barack Obama talked about ‘glimmers of hope’.  Check out this article from Bloomberg that talks about one of the growth industries of 2009 being the use of the term ‘green shoots’!

There are doubters about the economy, of course.  Lots.  But one can’t deny that the stock markets have at least improved since the Springtime, and with it business confidence for many industries.

But how about M&A.  I am talking to dealmakers, journalists and advisors daily in the M&A arena.  And here it’s a mixed bag as well.  But ‘green shoots’?

First the facts.  It’s been widely reported that the first half of 2009 was the worst in ages (five years by most people’s count) for M&A deal volumes.  The mainstream news even reported this, whereas they usually don’t report about M&A deal volumes at all (see the Fox News coverage here as an example of one new channel’s reporting last month).  As for July?  Check out the excellent Wall Street Journal Deal Journal blog on July volumes being a new low.  So any springtime M&A green shoots seem to have withered in the summer heat.

Or have they?

Not that I want to be seen as being overly optimistic, but I think the sentiment in the market is stronger than the July and August figures show (yes, August won’t set any volume records on the high side either, it seems).  Dig deeper.  Not green shoots, but strong roots.  More industries being active (not just pharmaceuticals and extractive industries as earlier in the year with the high-profile mega deals, but activity now in the technology sector, professional services, retail, industrials, energy and telecoms).  M&A advisors are busier — and not just with post-merger integration work from deals closed in 2007 and 2008 (which was much of the activity earlier in 2009).  Even the airlines serving businessmen and businesswomen are seeing upticks in traffic.

It’s happening.  Bernanke and Obama may have prematurely called the end of the downturn in the M&A market (and in all fairness to them, they were talking about the overall economy, and not the M&A market), but now it may finally be true.

I’d be interested in hearing if others share the feeling…

Distressed and bankrupt acquisitions: Should you do one of these deals?

The answer to the question above?  Absolutely ‘yes’.  That is, If you’re the distressed seller.  And if you are the distressed seller, you may have no choice anyway if you’re actually already bankrupt, insolvent or moments away from being so.

The answer for distressed sellers is easy.  Sell.  But for buyers the answer is more complex.

Cass Business School’s M&A Research Centre (of which I’m the Director) recently completed a very comprehensive study of distressed and bankrupt / insolvent M&A deals (with the sponsorship and support of the law firm Allen & Overy, investment bank Credit Suisse, accountancy and advisor Deloitte and the Financial Times / Mergermarket).  In comparing those types of acquisitions with healthy ones, the study looked at over 12,000 deals, including 2652 distressed targets and 265 bankrupt / insolvent ones.  The study period spanned 25 years from 1984 through 2008.  It focused on strategic deals, and excluded so-called ‘financial sponsor’ deals (typically done by private equity firms).  Details of the study (including definitions used to define a company as ‘distressed’ are included in a full report that can be ordered here).

Unfortunately for the buyers, ‘buying cheap’ does not guarantee higher returns to shareholders, except in the time immediately around the announcement of the deal.  Thus, the market appears to like these acquisitions initially when announced, but then the bloom comes off the rose as the hard work of saving — in fact integrating — the target begins.  Interestingly, as is commonly known, the typical M&A deal announcement results in an immediate decline in the purchaser’s share price (which is confirmed in this study), so at least purchasers of a distressed or bankrupt company get a better initial reaction.

Longer term, whether they bought a distressed or bankrupt company, the study found that the performance of the purchasers declined,.  This was measured by looking at a number of financial factors, including return on equity.  Thus it appears that these deals didn’t meet their expectations.  Caveat emptor. Let the buyer beware.  As with all purchases in life, if it looks like too much of a bargain, there’s probably something wrong with it that you don’t know yet.

There were some other interesting findings in the study:

  • If a target is distressed, it is more likely that the acquirer will be from the same industry (a competitor) than for healthy acquisitions.  It does seem as if there’s at least some attempt by those who know the industry well to try to save a company that’s had problems, although perhaps in light of the finding about long-term success, perhaps this is a case of hubris or misplaced confidence.
  • There was an interesting geographic difference:  the US and UK stock markets react differently to acquisitions of distressed targets.  There is insignificant or even negative immediate reaction in the UK to the buyer’s share price when they announce a deal involving a distressed company, but in the US the opposite is true.  The UK shareholders appear to have made the correct decision!

Lastly, and critical to today market situation, the study found that the best time to strike a deal for a bankrupt target is just after a major crisis (such as we have right now) when the markets are starting to recover.  In these times, both the acquirer and target show gains.

‘How to survive the maelstrom of a company merger’ (Financial Times)

In the Financial Times of 30 June 2009, columnist Stefan Stern wrote an article about how to survive a merger, having in hand an advance copy of my new bookSurving M&A: Making the Most of Your Company Being Acquired

Gratifying to see Stefan Stern’s suggestion that ”…we should be grateful that Scott Moeller…has picked this moment to publish a useful new book.’ 

He goes on to agree that everyone in two merging companies needs to be thinking about their future as possibly uncertain, that talent doesn’t necessarily mean you’re a personal winner and nor does seniority (in fact, in the latter case, it works against you), and that there are ’strange, disingenuous things’ said during the deal. 

As Stefan Stern said in the article:  ‘M&A can be fraught and filled with potential hazards’.  Exactly!  Which is why a proper defensive — or even offensive — plan is needed by each and every employee.

Anyone with any examples of the above?  Please comment on our companion weblog, Surviving Mergers!

M&A premiums: What’s happening?

Just last month, Liam Vaughan at Financial News wrote about increasing M&A premiums as ‘buyers in the M&A market are being forced to pay more over and above a takeover target’s share price than they have for nearly a decade.’  According to Dealogic, Liam said the average one-month premium last month was 29.5%, up from 24.1% the previous quarter and 24.3% for the same quarter last year.  He quoted me saying the following:  ‘Corporates don’t want uncertainty in today’s market which is why they go for a bear hug offer to ensure recommendation from the board…’

Now, one month does not a trend make, but this is certainly much higher than the 2007 average premium of 21.2%.

He also quoted me (sorry, their website is subscription only, but if you have a subscription, the link is here):

‘Scott Moeller, director of M&A research at the Cass Business School, said:  “Strategic buyers with cash are able to make acquisitions on a longer-time basis.  They also don’t want to enter into a protracted offer period so will go for a bear-hug [higher and pre-emptive] offer to ensure a recommendation from the board.”’

This is all the more interesting because of the relative lack of financial buyers in the current market competing for targets (and therefore driving up deal prices).  One would normally think that the disappearance of a substantial group of buyers (the private equity and venture capital firms) would cause premiums to decline.

Then, just last week, Liam again wrote about this topic (once more, if you have a subscription, the article is here), using data from a recently released JP Morgan M&A report which had also noted the increase in premiums recently.  The JP Morgan study found that the premium (offer price over share prices one month earlier) were 23.8% in 2007 (yes, different analysts come up with differnt figures, but at least this isn’t too far from the other figure for 2007 above) and notes that the 2009 year-to-date figure is 29.8% (fortunately, remarkably similar to the figure above for May 2009).

Interesting in the JP Morgan study, the one-day premium figure for 2009 year-to-date is 32.7%. This one-day figure for 2009 is higher than the one-month premium.  Usually, it is lower (or 2007, for example, the one-day premium was only 16.6%).  Why is it usually lower?  Two reasons are normally given:  1)  that there are leaks to the market either intentionally or not (including outside observers who are correctly ‘guessing’ that two companies are in talks with each other) and 2) that the markets in industries with a lot of M&A activity are normally on the upswing (as was certainly the case through much of 2007, the year of the last M&A market peak).

So why is the one-day premium in 2009 HIGHER than the 30-day premium and therefore different from the typical experience?  I believe this is a reflection of the declining stock markets for much of this period – as the deal prices are usually set well before announcement date, and at least by a week or two if not longer.  Therefore, in 2009, the price was set but then by announcement date the target’s share price had declined some more.

The declining market also offers another reason for higher premiums at a market low, such as we have now.  The relative bargains for such companies makes it easier for healthy companies to afford to buy the targets, and especially if the acquisition was part of a long-standing plan to make the purchase, and the buyer is opportunistically making the purchase now that it is available at a cheaper price than they ever had imagined possible.

I’d be interested in hearing any other ideas as to why premiums are up year-to-date, and whether anyone believes they will decline yet again in the next merger wave as the stock market comes back.

M&A Tipping Point

Are we at the tipping point where we are back into a more robust M&A market? 

Just look at yesterday’s headline in the Financial Times‘M&A springs back to life’.  Reporting on three mega-deals (Oracle’s agreement to buy  Sun Microsystems for $7.4 billion, PepsiCo’s offer of $6 billion to buy out investors in its two biggest bottlers and GlaxoSmithKline announcement of a $3.6 billion purchase of Stiefel Laboratories), it really did look like a ‘Merger Monday’ … evoking memories of many a ‘Merger Monday’ back in the heyday of 2006 and 2007. 

I was at an M&A breakfast this morning sponsored by CriticalEye and Accenture, and not only did the event start with the moderator showing yesterday FT headline, but the general concensus was the FT was reporting something that market practitioners had been seeing for a while, at least for strategic deals.  (Notably, there was some disagreement about private equity deals.)

There certainly seem to be more bulls now than bears amongst the people in the M&A market that I see.  The backlogs on deals is not getting smaller anymore, even though financing for deals is still tight and deals continue to be cancelled that had been many months in the making. 

Whereas only a few weeks back, the general concensus was that the reviving M&A market was limited to a relatively small number of industries (led by pharmaceuticals — sse the post here of a few weeks back), now there appears to be activity in a number of industies.  Although, I must admit, despite the Oracle / Sun deal, relatively few in the technology sector for the moment.  Deals also don’t appear to need the government to make them happen, as we had in financials last year.

Are we at the tipping point?  Before answering, do note that The New York Times reported on 29 October 2008 — almost six months ago — in a similarly entited article (‘The Tipping Point? Merger Deals Could Be Ray Of Hope’) that M&A might be leading the overall equity markets out of their bottom.

M&A Advisors and the New World Order

There’s been a lot written recently about the impact of the downturn on the rankings of the major M&A advisors:  much has been made of the drop of Goldman Sachs from the premier position to be overtaken by JP Morgan and Morgan Stanley, and the appearance of Evercore Partners in the top 10 (really in their case on the back of credit for one deal — albeit the largest of the first quarter — where they advised the pharmaceutical giant Wyeth in its $64.5 billion acquisition of Pfizer;  overall Evercore only did three deals in the quarter versus UBS’ 44 who were in the position just above them in the league table). 

Is it really a new world order of M&A advisors, or just ‘business as usual’?  I think the latter.

Of course, one quarter does not a year make.  But a number of analysts have noted that the firms who have taken large sums of government money (Bank of America Merrill Lynch and Citigroup) went down in the league tables:  yet note that they didn’t drop much and are still firmly in the top 5.  Credit Suisse had a nice increase of two spots, but otherwise the list looks pretty much the same as it always does.

Nevertheless, there are lots of reports of banker poaching.  Again, what these reports seem to ignore is that this is ALWAYS the time of the year when people move – after bonuses are paid (even if this year the bonus season was missing).  In fact, I would suggest that the poaching of bankers from one firm to another is not necessarily a sign of lack-of-health at some firms and vigour at others, but more a sign that the entire M&A market is beginning to stabilise, with perhaps signs of the long-awaited uptick. 

Particular note has been made of departures at Merrill Lynch following its acquisition by Bank of America.  But put this in perspective, too.  Go back almost 10 years to the acquisition of Bankers Trust (with it’s M&A crown jewel of Alex Brown) and look at the news reports of people departing after the acquisition by Deutsche Bank.  Yet Deutsche is today solidly amongst the top 10 M&A advisors consistently.

First Quarter M&A Deal Volumes 2009 — Good sign?

Can we see the light at the end of the tunnel?  I think I can.

The deal volumes for the first quarter were not bad.  Not great, but the fact that they weren’t bad is a good sign.  Just as in the housing market, when the declines end, that’s taken to be the start of the new bull market.  Of course, it’s too early to predict an upturn in the market (whether M&A — on which I am happy to offer an opinion — or the real estate market — about which I would not opine).  But there’s hope where none existed before.

Why am I confident in saying this, and having it posted here for posterity?  It isn’t just the deal volume of the first quarter (nicely reported in the Financial Times here on 29 March 2009) at $525 billion with the FT headline ‘M&A starts year with 36% fall’.  Yes, this was down over a third from the already-depressed levels of Q1 2008.  But if this ‘depressed’ level continues for the year (that is, if you annualise the first quarter), then you get a total year level of $2.1 trillion.  A respectable level that still would put 2009 in the top 10 years of M&A ever, and well above the 2002 trough of $1.2 trillion.  Now THAT was a depressed level.

This does bear noting.  Peak (1999) to trough (2002) in the last merger wave was down 72%.  If 2009 really is the trough following the last peak (2007), then the decline is ‘just’ 55%.  Not, as I’ve written last year, Armageddon.  Not pleasant for the market, but there are other financial markets that have been hit much worse.

In the past several weeks, I’ve been speaking to a lot of practitioners in the M&A markets here in Europe.  They have longer and larger backlogs than several months ago.  They are beginning to think about hiring, and some actually are selectively adding to their teams (usually when they can get someone from one of the larger M&A firms who are struggling because of reasons other than their M&A deal volumes).  No one has been talking about another round of redundancies or a reduced backlog of deals.  Now…THAT’s encouraging. 

And other analysts are seeing the same thing.  Regent, a boutique technology M&A advisor here in Europe, wrote a report that shows in their sector that the ‘nadir’ was in November last year.   

Anyone else seeing the light at the end of the tunnel?

Great: A big deal! Merck / Schering-Plough

It’s nice to see that I can hold my head up high in my Mergers & Acquisitions classes again and say that the M&A market isn’t dead … despite many obituaries having been written recently by many in the press. 

I was teaching Mergers & Acquisitions with a group of non-executive directors in the healthcare industry earlier this week.  It’s been a long time of teaching since I’d been able to discuss a current deal with my class.  Thank you, Merck.  I have a new class of MBA students that starts on Thursday of this week and it is great that I can kick off the class with some discussion of a front-page mega deal.

The news was that earlier this week, Merck announced a mega-deal in agreeing to take over it’s rival Schering-Plough for $41 billion.  This was the second big global pharmaceutical deal in six weeks (following Pfizer’s $67 billion purchase of Wyeth).   Do two deals make a trend?

Why does this make me so happy?  Simple.  The deal made the front page of the Financial Times (see the story that appeared on the front page 10 March 2009 here).  I could hold up the paper in class and say ‘See, here’s a deal that we can discuss.’  Current deals are always more fun (not that the ‘old’ deals are unexciting:  I certainly enjoy teaching the case study I wrote on Malcolm Glazer’s acquisition of Manchester United (I think the football (soccer) fans in the class enjoy it as well, even if they are Arsenal, Chelsea or even Bayern Munich supporters) or the very exciting takeover attempt by Sir Philip Green of Sir Stuart Rose’s Marks & Spencer).  Note that two years ago when I went into a lecture or conference, I could hold up the Financial Times and say:  ‘Look at today’s paper:  there’s four major stories on the front page and each one is about a merger or acquisition.’  I don’t anticipate being able to do that for a while, but even one story on the front page is helpful and encouraging!

As icing on the cake, Federal Reserve Board chairman Ben Bernanke yesterday said ‘I think there is a good chance the recession will end later this year…’

It was also refreshing to see another ‘back to the future’ headline in the Financial News‘Morgan Stanley tops M&A league table with Shering-Plough Deal’ which went on to explain that Morgan Stanley had finished fifth in the global league tables last year but is now in first place year-to-date.  Does this mark further return to normality in the markets?

Impact of Sovereign Wealth Funds

There’s an excellent piece of research recently published on the impact of sovereign wealth funds on the companies (mainly in the West) in which they invest their money.  See a summary in the Financial Times HERE.  As an academic study, you can see the full report HERE.

Much of the report has to do with operational and finanical (including market) performance of companies in which the sovereign wealth funds have invested.  The report shows that target company performance improves after a fund has made its investment.  There are also significant corporate governance issues that are contrary to the conventional wisdom (especially the statements of many Western politicians):  apparently, the average investment of a sovereign wealth fund is 0.74% share ownership — clearly not a controlling interest! — with an investment of just over $46 million.  These are not what the popular press would have you believe.

Why is this of interest in M&A, as most of the investments are clearly not therefore for control of the companies in which they invest?  (And the study shows that in less than 0.5% of their investments are the sovereign wealth funds taking a 50% ownership position or greater.)  The interest lies in what impact these funds have on deals and where there is potential for an ultimate acquisition. 

Anecdotally, it appears that M&A deals in certain areas with sovereign wealth funds behind them have caused problems:  the proposed purchase by DP World (controlled by the Dubai government) of P&O’s US business or when the Kuwait Investment Office in 1987 purchased 20% of British Petroleum (but was later forced to sell half it’s stake).  The Chinese oil company, CNOOC, ran into problems as well in 2005 when it tried to purchase the American oil company UNOCAL. 

This study can therefore go a long way towards showing the supporting role that these funds can play — even if recognising that power could be exerted if they wished, albeit not in most cases through direct control because of a majority position.  Thus the above three examples should have been allowed, if you believe this study which is expertly documented.

Anything at this time to support the re-emergence of the M&A market is welcomed.  Just as basic funding and liquidity enables most companies to continue operating effectively (and the lack of liquidity being a major issue for many companies now), an effective M&A market is necessary for the health of the economy too, as it enables the strong to become stronger (up to the point where anti-monopoly issues would arise) and the weak to be taken over by the strong, and thus strengthened overall.  M&A done properly does result in 2 + 2 = 5.  These days, that can’t be bad.

Have we hit bottom?

What’s happening in the M&A market? This is well covered elsewhere, and no one needs to be told that the volume of business is down from peaks. ‘Have we hit the bottom?’ is one question on everyone’s mind, and depending on who you talk to, the second question may be ‘How much longer until we hit the bottom?’

I think these are the wrong questions. There still – in historical terms – are lots of deals taking place. 2008 may have been a terrible year, but with $2.9 trillion of completed deals (yes, these still did complete, even if many shouldn’t have!), you would still have to reduce that already ‘low’ number by two-thirds to a level of $0.9 trillion to be at the peak we saw before the 1990’s. Many companies did deals in the 1980’s and many advisors made excellent money in that era as well. Perhaps we are just now back to levels more reasonable in that era.

The right question is: ‘What’s changed about the M&A market?’ There’s a lot of discussion about whether the world has truly changed or whether this downturn – extreme and painful as it is – is temporary. We really won’t know that answer for a number of years. Signals are mixed: you can point to some that say we’re heading for chaos in the streets and bare shelves in the supermarkets, yet others point in the direction of recovery by 2010, as evidenced by testimony earlier this week by the Federal Reserve Chairman.

Under either scenario, the need for companies to merge and acquire remains. Deal terms may be different than in the past. There will be many more ‘forced marriages’ such as the ones that the British government arranged last year. Sovereign wealth funds will continue to need to invest their petro-dollars and other currencies. The recession or depression will caused bankruptcies and insolvencies that will provide bargains to those still able to pay. Because of the depressed stock markets, volumes must be down (in purchase price terms) no matter what for a period, because prices are driven by the market valuations. But deals will still happen. They must and they will. There doesn’t need to be a trigger to the next M&A wave other than equity valuations. And for those, you can still ask the questions about whether we’ve already hit the bottom and if not, when will we…

M&A Deal Volume, 2008: It’s all relative…

Do you really want to know? Of course you do. Bad news is exciting. Too exciting.

The market for M&A deals dropped to their lowest levels since 2005 — to just under $2.9 trillion. A decline of 28% globally. See … it wasn’t that bad, was it. It’s all about relativity. If we’d just had three years of $3.0 trillion in deals in 2005, 2006 and 2007, then this wouldn’t really seem low. Everyone would still be talking about a robust market, because these levels are well above all but two years of the last merger wave (in 1999 and 2000). It is just that we’ve gotten used to increases in the number and size of deals.

What’s changed? Private equity-backed deals were driving the market over the past several years. They declined 72% in 2008. These are the deals that drove the pricing for many non-PE deals as well. Thus, although they represented only under $200 billion (only?), they did have a larger impact on the overall market.

Where else was it bad (remember, the relative term of ‘bad’)? Europe was down 34%, the US down 25% and the Asia Pacific region ‘only’ 17%. Europe was actually even worse, when you look at the deals actually done because four of the largest ten European transactions were state bailouts: Royal Bank of Scotland, Lloyds TSB / HBOS, Fortis and ING.

M&A Deal Volumes: It’s not Armageddon, Part 2

At the half year point, I noted that although deal volumes were lower, the world had not ended for M&A deals in 2008 (see here).  Reading the papers, one would have thought that no deals were being done — and certainly the hype of the market was gone, with the front pages of the Financial Times and the Wall Street Journal usually being taken up with stories other than large M&A deals.

Another interesting note in the news today, in Financial News online today:  With the inclusion of the €9.8 billion Commerzbank acquisition of Dresdner, the volume of deals as of earlier this week hit the $2.5 trillion mark — which, if no other deals materialised for the next four months, would make it the seventh strongest M&A year ever.  But that story in the Financial News said that this milestone was reached two months later this year than last year.  That’s not a bad news story for M&A, as I read it as a good news story that the market remains so strong.

Of course, there are bright spots and dark corners of the current market.  Despite the Commerzbank / Dresdner deal, the financial services industry has seen the greatest fall in deal volume (42%).  Mining and consumer products are the only two industries that are so far showing more deals this year.

Also of note:  strategic deals are down only 16%, and the disappearance of many venture capital, private equity and hedge funds from the market has caused the financial deals to fall 63%.  Overall, the M&A deal market is 27% lower.

If we annualise the current volume, we’ll see the 2008 market at $3.75 billion, which will make it either the third or fourth best year ever.  Not Armageddon.

It’s not Armageddon: M&A Deal Volumes in the First Half 2008

Reading the papers and listening to the news, you would think the bottom’s dropped out of the M&A market in the first half of 2008.  Just last week, the headline in the Financial Times on 27 June 2008 was ‘Value of M&A falls sharply as buy-out boom ends’. 

A closer read of the stories yields another answer.  Granted, the value of M&A deals in the first half is down nearly a third compared to the first half of last year:  $1.86 trillion, according to Dealogic.  But if you annualise this figure, you will find that the volume of over $3.7 trillion would make 2008 the third or fourth largest year ever — and larger than 2006 that many people at the time thought would be the peak of the current merger wave.

M&A Deal Volumes

There are some significant changes, although some things (such as Goldman Sachs topping the list of advisors) never seem to change.  Deutsche Bank and Morgan Stanley appear to have fared most poorly.  And overall, at least in Europe, investment banking fees are down commensurate with the market (35% in the first half, according to the Wall Street Journal).  Private equity / venture capital deals are 78% lower and represent just 6% of the global M&A market, according to the FT.  Their deals, of course, drove the market up in this last most recent merger wave in the mid-2000’s.  Asia is holding up the volumes in 2008, by-the-way. 

What will the second half bring?  We do need to see some continuing announcements of blockbuster deals, but if there are a few (and I understand there are some in the works), then 2008 won’t look as bad as predicted by the Cassandras of the press and other industry pundits.  I do hope I’m right and they’re wrong!