Dealmaking is at the beginning of a recovery whose peak will exceed the record $4 trillion of takeovers clinched at the height of the merger boom in 2007, according to Evercore Partners Inc.'s Roger Altman.
Companies are pursuing deals “in the midst of a classic, cyclical upswing,” said Altman, founder of New York-based investment bank Evercore. Buyers from Applied Materials Inc. to Teva Pharmaceuticals Industries Ltd. racked up more than $32 billion in purchases globally this week, bringing 2011's total to $839 billion, a 23 percent increase from a year earlier, according to data compiled by Bloomberg.
“Our view is that, at the peak of this new cycle, total volume will surpass the previous 2007 peak,” Altman said in an interview this week. M&A cycles “tend to last five to seven years, and we are two years into it.”
The busiest industries for dealmaking are natural resources, health care, financial services and technology, said Altman, whose firm advised AT&T Inc. on its $39 billion takeover of T-Mobile USA, the biggest since 2009. Including debt, there have been 23 corporate takeovers valued at more than $5 billion so far in 2011, almost double the number a year earlier, the data show.
Teva's agreement to buy Cephalon Inc. for $6.2 billion led this week's deals, followed by Applied Materials' announcement that it would buy Varian Semiconductor Equipment Associates Inc. for $4.9 billion to add technology for chips used in mobile devices. Also this week, ConAgra Foods Inc. sweetened its bid to buy Ralcorp Holdings Inc. for about $4.9 billion, an offer that was rebuffed by the maker of Post cereals.
Asset Bubble?
Global deal volume will gradually grow to surpass the 2007 record and reach $4.5 trillion in 2013, driven by the cash companies stockpiled during the recession, low interest rates and relatively cheap valuations, said Paul Parker, global head of mergers and acquisitions at Barclays Capital in New York.
The U.S. has kept its benchmark interest rate near zero since December 2008 to support an economic recovery and the Federal Open Market Committee has pledged to leave it there for an “extended period.” The European Central Bank on May 5 left its benchmark rate unchanged at 1.25 percent.
“Longer term, artificially depressed interest rates risk creating another asset bubble,” Parker said in an interview at Bloomberg's headquarters in New York yesterday. “That threat is likely offset by the fact that rates will necessarily increase and in this cycle versus the prior cycle emerging markets are replacing financial sponsors as the key M&A driver.”
This year, 14 percent of deal volume involved a company from Brazil, Russia, India or China, according to Bloomberg data. In the same period of 2007, about 9 percent of M&A involved a company from one of the so-called BRIC countries. India and China, the world's fastest-growing economies, are seeking takeovers to secure natural resources.
Cash Piles
Dealmaking so far in 2011 has still been dominated by North America, with $419 billion takeovers in the region accounting for about half of the total volume, the data show. AT&T and Deutsche Boerse AG, going after NYSE Euronext, both announced deals to leapfrog their biggest competitors.
Also driving M&A is shareholders who are pressing companies to put their cash to work on takeovers, according to Parker. The 3,000 biggest non-financial public companies tracked by Bloomberg worldwide have about $4.8 trillion cash and short-term investments, according to their last annual filings.
“Cash on the balance sheet is absolutely dilutive,” Parker said. “It's not earning anything where interest rates are. As it continues to build up, you either need to use it or give it back.”
Falling Premiums
Premiums in the first quarter dropped to the lowest since the third quarter of 2007. Public companies demanded an average 17 percent premium to sell themselves in the quarter, down from 31 percent at the start of 2009, after the Standard & Poor's 500 Index jumped more than 90 percent from its March 2009 low.
While higher commodity prices threaten to damp companies' rising stock prices and profitability, they may help drive consolidation in natural resources, Parker said.
Commodities dropped the most in more than two years yesterday, paring this year's gains to 8.2 percent, on concern about slowing economic growth. The broader M&A market has shown that it's able to shrug off temporary external shocks, Parker said.
“It will go a little bit in fits and starts but the trend is going to be gradually upward,” said Barclays's Parker.
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