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By Jason Simpkins
The U.S. buyout market is about to enter a new phase, as corporate takeovers pick up where private-equity firms left off last fall.
The deal-making market is a key to the health of the U.S. stock market. During much of 2006 and 2007, it was the steady stream of private-equity buyouts and corporate mergers and acquisitions (M&A) deals that propelled the key U.S. stock indices to one record high after another.
When the deals are flowing, investors are willing to pay more for their shares, figuring the odds for a nice payday are higher. And the deal market was white-hot through the middle half of last year. Private-equity firms had amassed huge war chests. They were buying stakes in big companies and were buying smaller companies outright.
But when the subprime-mortgage crisis morphed into a credit crisis, the financing spigot for private-equity funds was largely turned off. And the deal flow slowed to a trickle.
The tepid deal-making market has carried over into the New Year. Recent data from Thomson Financial (TOC) suggests that worldwide M&A deals slumped by nearly one third in the first quarter of 2008. But that doesn't mean the M&A market is dead in the water. Instead, it means that cash-laden corporations will be taking the baton from the private-equity firms and will re-ignite the buyout binge.
The one caveat: Companies, buyout firms and banks are being more selective about picking partners, and are looking for comprehensive, "perfect-fit" deals.
Louis Basenese, editor of, an investment newsletter dedicated exclusively to buyout deals, says the recent falloff in M&A activity is merely a shift in the balance of power.
In recent years, private equity firms have practically defined the M&A market by outbidding companies for assets. But it was those same buyout firms that led the collapse in first quarter deals, with a 77% drop in acquisitions.
"What few realize is that M&A doesn't need cheap financing to continue. Corporations are sitting with almost near record amounts of cash on their balance sheets," Basenese said. And with all that capital, they can "take advantage of the depressed stock prices of competitors without the fear of being outbid by overly aggressive private equity shops."
New Research Report
Thomson Financial said Friday that global M&A volumes plunged 31% to $661 billion in the first quarter of 2008. But that drop off comes after a banner year for M&A activity. Total global deal volume checked in at $4.5 trillion in 2007, up 24% from the previous high-water mark set in 2006. U.S. deal volume also hit record levels last year, jumping 9% to reach $1.61 trillion, Thomson said.
Since then, credit conditions have tightened significantly as many banks were burned badly by credit defaults. But while an era of "easy money" has come to an end, there is still ample opportunity for takeovers and tie-ups.
In fact, now that stock valuations have plummeted, many larger, blue-chip operations are using the opportunity to bargain hunt. A rush of opportunists such as Microsoft Corp. (MSFT), Time Warner Inc. (TWX) and JPMorgan Chase & Co. (JPM) have already taken advantage of market value and secured some heavy acquisitions.
Deals On The Docket
For instance, Microsoft made its move with an unsolicited $44.6 billion bid for Internet portal operator Yahoo! Inc. (YHOO). So far, Yahoo has done its best to thwart Microsoft's advances, but most analysts believe Microsoft will get its way if it ups its $31 a share offer.
"We believe that a Yahoo sale to Microsoft – at a price likely higher than the initial $31 bid – is the most likely outcome," Citigroup Inc. (C) analyst Mark Mahaney wrote in a note to clients.
Yahoo has suffered eight straight quarters of declining profits, struggling to compete with Internet-search rival Google Inc. (GOOG). Microsoft and Yahoo considered various avenues of cooperation a year ago, but Yahoo rejected the notion of a takeover. Now, desperate to not let Google run away with the market, Microsoft has made its move.
However, Yahoo's explicit opposition to the takeover makes it impossible to rule out a narrow escape.
"While we continue to see no other competing bidders, we believe Yahoo is aggressively pursuing strategic alternatives. One possibility is a tie-up with Time Warner, whereby Time Warner would contribute its online content assets to Yahoo in exchange for a stake. We believe this could serve as a forcing function to a higher Microsoft bid," Mahaney said.
Time Warner's AOL recently made a move of its own, with its $850 million acquisition of Bebo Inc., a popular online social network. The San Francisco-based Bebo has 40 million members around the world and an especially strong presence in Britain. While social networking sites like Facebook and MySpace have the American market locked up, 60% of Bebo's traffic comes from Europe and 16% from Asia.
A recent article in BusinessWeek, suggested eBay (EBAY) may be the next tech company to make a move in the M&A market. Lorraine McDonough, eBay's mergers chief, told the magazine that her company is in a "good position to make acquisitions."
The company kicked off 2008 with a hasty purchase of payment-security firm Fraud Sciences for $169 million. And eBay isn't stopping there. The company expects to make eight or nine more acquisitions this year.
Despite stagnating economic growth and abysmal credit conditions high-tech mergers and acquisitions have surged 132% this year through March 25. And the tech sector isn't the only sector abuzz with M&A activity.
Deals are also taking off in the finance and steel industry.
BHP Billiton Ltd's (BHP) attempted takeover of rival Rio Tinto PLC (RTP) in 2007 got the ball rolling in raw materials. The company's revised $147 billion offer sent other smaller industry players scurrying to find deals of their own.
Aluminum Corp. of China (ACH) and Alcoa Inc. (AA) surprised BHP by snagging a 12% stake in Rio Tinto. Another major player, Anglo American PLC (AAUK), responded by selling off gold, steel and paper assets and expanding in copper and iron ore. Several Latin American sources revealed that Anglo is looking to acquire a sizeable stake in Brazilian mining and metals company MMX Mineracao e Metalicos SA.
Earlier this month, the U.S. Federal Reserve had a huge assist in JPMorgan landing The Bear Stearns Cos. Inc. (BSC) for a bargain basement price of $1 billion. Now rumors are circulating that Lehman Bros. Holdings Inc. (LEH) could be next.
Lehman stock closed down more than 9% last Thursday after rumors that the fourth-largest U.S. investment bank could face a run similar to that of Bear Stearns surfaced.
Declines in Lehman's shares on Thursday were "all being tied to fears of Bear Stearns," Robert Bolton had trader at Mendon Capital Advisors told Reuters. "Does another broker dealer go the route of Bear Stearns with regard to their solvency and the like"
Lehman responded, saying the rumors were "totally unfounded."
Regardless of whether Lehman is the next domino to fall, asset prices are plummeting in every sector. And with each dip the market takes those assets become even more enticing to hawkish industry leaders.
News and Related Story Links:
- Money Morning:
M&A Activity May Add Some Sunshine to the Gloomy Markets
Tech M&A: It'll Be a Good Year
Lehman's stock drops amid rumors.
Mergers Expected to Spur More Stock-Buying.