M&A Set to Accelerate in 2011 After a Late November Surge

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A flurry of mergers and acquisitions (M&A) in late November could presage the biggest surge in deals since the economy tanked three years ago.

In just the last week, nearly $25 billion in M&A deals were announced. BP PLC's (NYSE ADR: BP) sale of its majority stake in Pan American Energy, which went for $7.1 billion, was at the top of the list. With that sale, BP will have secured about $21 billion of the $30 billion it hoped to raise from asset sales to help cover damages from its oil spill disaster.

Other deals of note included:

  • Swiss engineering group ABB Ltd. (NYSE ADR: ABB) will buy U.S. industrial motors firm Baldor Electric Co. (NYSE: BEZ) for $3.1 billion to boost its North American presence.
  • Wal-Mart Stores Inc. (NYSE: WMT) will pay $2.3 billion for control of Massmart Holdings (PINK ADR: MMRTY), giving the world's largest retailer a substantial presence in South Africa and paving the way for further expansion across the continent.
  • Thailand last week joined the crush of Asian countries rushing to acquire a stake in Canada's giant oil sands projects when its PTT Exploration & Production Public Co. Ltd. (OTC ADR: PEXNY) agreed to buy 40% of Statoil ASA's (NYSE ADR: STO) Canadian oil sands project for $2.3 billion.
  • Coty, one of the world's largest fragrance makers, announce a $1 billion deal to acquire OPI, a popular maker of premium nail polish products, marking Coty's third acquisition in less than three weeks.
  • Novell Inc. (Nasdaq: NOVL), the workload management company, agreed to a $2.2 billion deal with Attachmate Corporation, which is owned by Francisco Partners, Golden Gate Capital and Thoma Bravo.
  • Del Monte Foods Co. (NYSE: DLM) — the pet foods maker, not the seller of pineapples — agreed to sell itself for $5.3 billion, including debt, to a group of private equity firms led by Kohlberg Kravis Roberts.
  • Retailer J. Crew Group Inc. (NYSE: ACG) confirmed that it would sell itself for about $3 billion to the private equity firms TPG Capital and Leonard Green & Partners.
  • And Google Inc. (Nasdaq: GOOG) is near a deal to acquire closely held online discounter Groupon Inc. for as much as $6 billion, The New York Times reported on its Web site.

Do Takeovers Power Stocks Higher?

Global M&A activity is at its highest level since late 2009, providing a glimmer of hope for investors struggling to decipher stock and bond markets.

Global takeovers announced in the first three quarters of the year reached $2.03 trillion, an increase of 22% compared with the $1.67 trillion in deals announced in the same period last year, according to a report from data-tracking firm Dealogic.

Investors' hopes often soar when M&A activity picks up because acquisitions are often a sign that companies are confident the economy will grow and business will improve. Investors' hopes are also buoyed because few things cause the price of a company's stock to rise faster than an unsolicited takeover offer.

Consider that the all-time record for merger deals in a single year — $4.3 trillion, according to Dealogic — came in 2007. That's the same year the Dow Jones Industrial Average hit its all-time high.

The feverish pace continued in 2008, until deal volume fell off a cliff after the economy collapsed, and stocks plunged. November 2008 marked the lowest level of M&A activity since 1995, when Dealogic started tracking deal volume.

But thanks to low prices for takeover target companies, historically high cash balances and easier credit terms, the atmosphere for deals in 2011 is as positive as it's been since the credit crisis sent the economy, and M&A activity, into a tailspin.

Global M&A Set for Surge in 2011

Global M&A activity is expected to increase 36% next year to $3.04 trillion, driven by a big pick-up in deals in the real estate and financial services industries, according to a report released Monday by Thomson Reuters and Freeman Consulting Services.

The survey of over 150 worldwide corporate decision makers showed that instead of bargain-hunting for cheap equity deals, next year's buyers are expected to focus on expanding their core businesses to increase market share, Jeff Nassof, an associate consultant with Freeman told Daily Finance.

"We did the same survey last year and the target [company's] valuations were a factor," Nassof says. "But in this year's survey, people aren't just looking for distressed companies and value deals. They're looking at M&A as part of their competitive strategy."

The real estate market is expected to see a whopping 88% increase in M&A activity, with the financial industry finally recovering to post an anticipated 75% increase, the survey also showed.

While real estate M&A is expected to post a dramatic increase next year, Nassof pointed out that the sector is coming off of a relatively small base. Just $2.23 trillion in M&A deals were done last year.

"The overall 2010 levels are still pretty depressed. It's still nothing like the heydays in 2007," Nassof said. "In real estate, confidence in the economy was the top cited factor. Real estate managers are feeling better about the risk and growth out there."

While M&A in the financial industry is normally market-share driven, next year's activity will be marked by efforts to comply with government regulatory changes that call for big investment banks and institutions to wall themselves off from riskier investments, Nassof said. Last spring's financial reform legislation is forcing some big banks to shed riskier assets including hedge funds and certain derivatives.

Another industry expected to see an increase in M&A is health care, where the survey projects a 16% increase next year, largely due to consolidation as a side effect of healthcare legislation.

As usual, technology companies also are expected to be on the prowl. Executives expect valuations of buyouts will remain "reasonable," even though a recent bidding war between Dell Inc. (Nasdaq: DELL) and Hewlett-Packard Co. (NYSE: HPQ) for 3Par Inc. (Nasdaq: PAR) resulted in a premium of 244%.

Doing Deals in Emerging Markets

Emerging markets are expected to lead the M&A surge in 2011, just as they did in 2010.

Fully 47% of the executives polled said emerging Asian markets are ripe for M&A deals in 2011, with 43% targeting markets in the Americas. By comparison, only 30% are looking at Western Europe and only 18% find Eastern Europe and Russia attractive.

During the first three quarters of 2010, emerging markets accounted for 27.4% of worldwide M&A volume compared to 21% during the comparable period in 2009.

M&A activity in deals across international borders surged during the first nine months of 2010, totaling $723 billion and accounting for 41.2% of overall M&A volume, compared to 26.1% last year.

And Asian companies have the necessary cash to get deals done. According to a report from Moody's Corp. (NYSE: MCO), the total cash reserves of Asian companies touched $231.6 billion in mid-2010. Corporations in the Asian region (excluding Australia and Japan) have seen their aggregate cash balance – including cash, cash equivalents, deposits and short-term investments – grow by almost 60% since the end of 2008.

However, the Moody's report did not take into consideration the reserves of financial companies, in which case the total cash reserves figure would have been much higher.

U.S. companies had cumulative cash holdings of about $1 trillion, over four times more than their Asian counterparts, but the average cash balance of Asian companies was almost double that of US companies, the report noted.

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