Story in Investor's Business Daily
Merger Action Percolates Anew, But It Won't Reach 2007's Level
BY VANCE CARIAGA
INVESTOR'S BUSINESS DAILY
Thanks to a handful of high-profile deals, the market for mergers and acquisitions has awakened from its 2008 slumber.
Just don't expect it to spring out of bed and go for a brisk run that would catch it up to last year's torrid pace.
Strategic buyouts account for much of the recent activity. Private-equity deals have slowed to a crawl amid scarce financing from banks and other ailing financial institutions.
M&A experts expect that trend to continue. "The strategic buyers have the cash and the financing, and depending on the deal they also have stock in their own company," said Roger Aguinaldo, CEO and publisher of the M&A Advisor and a private-equity investor with Forest Hills Capital. "That's something private equity doesn't have right now."
Private-equity firms drove last year's M&A boom, but they've spent much of this year on the sidelines.
Only $152.4 billion in private-equity deals was announced in the first half, according to a report from Thomson Reuters. That's the lowest volume since 2005.
No leveraged buyout of more than $5 billion has been inked since July 2007.
As a result, financial sponsors accounted for just 9% of deals in the first half vs. 25% a year earlier, the report said.
Overall volume of worldwide deals totaled $1.6 trillion, down 36% from the record-breaking first half of 2007.
On the positive side, volume picked up 30% in the second quarter from the first quarter's slow pace. And experts see ample opportunity for deal making in niche markets.
Philip Stamatakos, a partner at the Jones Day law firm, notes interest in small and midsize deals.
"For us the deal number has been very strong, especially in the midmarket," said Stamatakos, who specializes in mergers and acquisitions. "We've also seen a lot of interest in strategic alliances and joint ventures, which don't require leverage, as an alternative to acquisitions."
Most of the recent headlines have focused on megadeals.
On Monday, Swiss drug maker Roche Holding offered $43.7 billion for the remaining 44% of Genentech, (DNA) the California biotech.
"We expect Genentech to refuse the bid and strive to remain independent, to preserve its culture," Joel Sendek, analyst at Lazard Capital Markets, wrote in a Monday note. "If a transaction takes place, it likely would be at a higher price."
Some high-profile deals involve companies looking to expand their market power by gobbling up rivals. That was the case last week when Teva Pharmaceutical (TEVA) announced plans to buy generic drug rival Barr Pharmaceuticals (BRL) for around $7.5 billion.
Similar deals include InBev SA's proposed $52 billion takeover of Anheuser-Busch, (BUD) and Dow Chemical's (DOW) plan to acquire Rohm & Haas (ROH) for $19 billion.
Much of the activity involves foreign buyers — like Roche, InBev and Teva — bidding for U.S. firms.
That's no surprise, given the weak dollar. Yet foreign companies have reason to tread carefully.
"I think there's some concern about the strength of the U.S. markets and economy, and that's caused some foreign (strategic buyers) to be cautious of the valuation of U.S. companies," Stamatakos said.
Other buyers share that concern. Unlike last year, when buyers were willing to throw gobs of cash at deals just to get them done, 2008 has seen restraint.
"As credit was readily available, sellers were accustomed to getting very high multiples, and buyers were willing to pay a lot," Stamatakos said. "But as credit has become less available, the multiples buyers are willing to pay have declined."