Thursday, May 23, 2013

Merger Mania: Boom Times Ahead?

Is this an era of good feeling in mergers and acquisitions?

Time for a break-up or spin-off?
Every other day in the financial media, a deal announcement soars through the headlines.  Dell's founder, Michael Dell, wants to buy back his company, but others bid for the same and "put the company in play" (sort of). US Airways and American Airlines agree to a blockbuster combination that lifts one of the companies out of bankruptcy. Warren Buffett and his Berkshire team decide to purchase Heinz for $23 billion, reinforcing the long-time notion that Buffett has the uncanny knack for extracting value from even the most mature food-products industries.  Sprint Nextel has its eyes on Clearwire. 

In the past week, an aggressive activist investor wants to shake up Sony Corp. and spin out its entertainment division, the unit that includes movies and music labels. Dan Loeb, using his Third Point investment-fund vehicle, prepares to take on the entrenched customs of the Japan financial system, which has always been a guardian of the country's ancient corporate practices and traditions.

Loeb argues that the market is under-valuing the entertainment division because profit margins are not as high as they could be and because performance will improve if its management group "focuses" sufficiently on operations. His argument and his finance logic are not unorthodox.  The daring boldness of his approach toward board members in their country is.

Yahoo, always scrambling to remain relevant and stay on the same stages as Google and Facebook, decides to toss $1.1 billion in the way of Tumblr and acquire it.

Have we wandered back into an era of big deals and industry-shaking merger transactions?  Are the times ripe for companies to stop hoarding billions in cash and start doing something productive with it?  Will we revisit the days of the explosion of deals in the late 1980s or the bubble bursts of the mid-2000s? Will transactions in recent months spur other companies, bankers and investors to do even more?

For a year or two after the financial crisis, companies recovered and conducted business, but they held onto cash generated from operations.  Misers, more or less, they were, in a word, scared. They hesitated to reinvest in new businesses and expansion. They worried about the coming of yet another crisis. They stuffed cash into safe, low-yielding assets because they worried they might not be able to tap debt markets to borrow, even if they could borrow at absurdly low rates. (Apple's billion-dollar stash in 2012 was the stuff of headlines and editorials--until this year when shareholders started pleading with the company to do something with it.)

Companies sat on the financial sidelines--not sure what was looming ahead, not sure of the impact of Washington political winds, not sure when the recovery would ever resume. With stock markets crumbling and volatile and with nobody able to project an economic turnaround, companies weren't eager to make acquisitions, do deals or do much of anything--except wait it out. 

As markets have recovered and business confidence has surfaced, companies with mountains of cash are deciding they must do something. They have begun to feel the pain of purchasing U.S. Treasury securities that accrue virtually no return. With equity markets on a roll--at least in early, 2013--companies can comfortably elect to do cash or stock acquisitions in the way they couldn't rationalize a few years ago. 

But does that explain recently announced big deals?

Statistics actually show merger activity in 2013 running at about the same rate as last year--in number of transactions in the U.S., around the global, in fees generated, and in the aggregate value of deals. Hence, the industry and market celebrate the fact that spikes of last year are not necessarily spikes, but perhaps signs of a new trend.

Through April, according to Factsheet, there have been about 10,000 announced corporate mergers, acquisitions, takeovers, or buy-outs involving U.S. companies over the past 12 months, slightly less than in the previous 12-month period.  The aggregate value of transactions is slightly higher. Certain industries have experienced more significant growth the past year:  broadcasting, real estate, computer hardware and retailing. 

The leading banks in advising companies tend to be the familiar crew of top investment banks:  JPMorgan, Goldman Sachs, Merrill Lynch, Credit Suisse, Barclays and Citi. Despite having withdrawn from much of investment banking, UBS is still booking remnant merger business.

Over the past few years, a couple of boutique banks, Evercore and Centerview Partners, have slipped through the back door to join this elite club. Evercore nudged its way in 2012-13 with key roles in deals involving Dell, Kraft Foods, and Ally Financial. It ranked 10th among global banks in the aggregate value of deals done in the first quarter, 2013, according to the Financial Times.

The stir around Sony will be intriguing to watch. Gather and get a front-row seat.  You have an irascible investor who likes to get his way and who has a sound track record. He bursts into Sony's offices in Japan to demand that the board respond to his request to spin out the entertainment group. (This week, the board agreed to ponder his demands.)

This kind of corporate jockeying and board-room maneuvering is nothing new in the U.S., but Loeb and Third Point are taking on a different culture, a country not accustomed to takeover tactics or threats from billion-dollar investment funds based in the U.S. However, these are better times even in Japan. Its economy has escaped doldrums under its new prime minister Shinzo Abe, who has taken the right steps to give it a swift kick. Japanese companies and investors might be open to Loeb's ideas--especially if they result in improved returns for all shareholders and two stronger companies.

Yahoo will be watched, if only to see if it can finally get one right. Yahoo is known for errant strategies and botched acquisitions and lagging behind the Internet-eyeballs race . With a new CEO (Marissa Mayer), who has injected hope, energy, and discipline into the company, the market might give it the benefit of doubt and treat the Tumblr acquisition as something that makes sense.

The deal numbers, the league tables, and merger statistics don't point to these being the best of times for merger bankers and private-equity investors. It's not 1986 or 2005 all over again.  Brisk, consistent activity, nonetheless, suggests we are far beyond the deal paralysis of the crisis, even with some large companies still paranoid and protective of some of their stashes of cash. 

The best of times? No. Better times than before? Yep.

Tracy Williams

See also:

CFN:  Boutique investment banks, 2009
CFN:  Today's Bulge Brackets, 2012
CFN:  Outlook, 2013
CFN:  Apple's Stash of Cash, 2012

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