By Don Miller
When Pfizer Inc. (PFE) unveiled a $68 billion buyout offer for U.S. rival Wyeth (WYE) last week, it sparked hopes that the deal might re-ignite the moribund merger market. But when the Wall Street dealmakers take a closer look, those flames will likely be doused in cold water.
For those rooting for a revival of buyout activity, the merger of the two companies shows that corporate predators are still on the prowl and adequate financing is still available for some big transactions.
But as Money Morning reported recently as part of its ongoing “Outlook 2009” economic forecasting series, the credit crisis has put the mergers-and-acquisitions (M&A) market into a deep freeze. And not even the marriage of these two U.S. pharmaceutical giants will be enough to thaw out the deal-making market anytime soon.
Both the size of the deal and the players involved represent a unique combination of favorable financing terms and corporate balance sheets that not many other companies can match in the current economic climate.
Pfizer, a company with strong cash flow and lots of cash on its balance sheet, did get $22.5 billion in financing for the Wyeth buyout, but others are unlikely to get the same terms. The drug company has a rare, stellar "AAA" credit rating from Standard & Poor’s Inc. [Editor’s Note: For a related story that studies the problems associated with the Pfizer-Wyeth merger that appears elsewhere in today’s issue of Money Morning, please click here].
Furthermore, lenders are “favoring sectors where there is the most stability” in earnings and revenue outlooks, like health-care stocks as well as certain education and technology firms, Howard Lanser, an investment banker at R.W. Baird, told BusinessWeek.
Other sectors such as retail are currently out of favor and likely to stay that way, he said.
That makes a return to the heady days of the mid 2000s – when bountiful M&A activity lined the pockets of Wall Street investment bankers – an unlikely pipe dream.
The volume of global mergers and acquisitions could fall about 35% in 2009 from an expected volume of $3.1 trillion in 2008, investment bankers say. That would be less than half of last year's record $4.4 trillion in deals.
"There are substantial headwinds facing M&A and the headwinds are not subsiding," Cary Kochman, co-head for Mergers and Acquisitions for the Americas at UBS AG (UBS), told the Reuters.
The No. 1 issue is the lack of available credit. Banks and other lenders have pulled back from financing deals, making loans, especially for big deals, scarce and more expensive.
“You are less likely to see deal sizes beyond the $20 billion mark in 2009,” said Larry Slaughter, co-head of European M&A for JPMorgan Chase & Co (JPM). “The balance-sheet capacity of the banking system will make it tough to finance much-bigger transactions.”
And fear is playing a close second fiddle to financing as a barrier to any revival of M&A activity. Most firms are holding onto any cash they have as insurance against a prolonged economic downturn.
"It takes a little courage to step forward and pursue M&A in this environment," Lanser says. "To spend that cash can be a big psychological hurdle."
Private Equity & Hedge Funds No Help
Even the so-called “masters of the M&A universe” – the leveraged buyout firms – are unlikely to ride to the rescue this time.
The Blackstone Group LP (BX), the No. 1 leveraged-buyout firm is staying on the sidelines searching for profits by advising companies in restructuring distressed debt.
The company that orchestrated a then record $34 billion acquisition of Equity Office Properties Trust in 2007 is playing a more modest role working consulting with AIG (AIG), as it sheds units worth about $60 billion to repay the government after its bailout last year.
Bankruptcies at investment banking’s most-hallowed companies like Bear Stearns and Lehman Bros Holdings Inc. (LEHMQ) obliterated the global financial system after buyout firms helped inflate the credit bubble. Now the private equity and hedge funds may be next to go, as LBO deal making enters the gravest crisis in its 40-year history.
Buyout firms such as KKR & Co. (KKR) and the Carlyle Group went on a record-breaking shopping spree in 2006-07, saddling themselves with $1.5 trillion in assets that they intended to sell for a profit. Since then, they haven’t been able to find buyers so they can reap the 20% profits they get for such deals.
“This is part of the biggest bubble to burst in our history.” Roy Smith, a former Goldman, Sachs & Co. (GS) partner told Bloomberg News.
As many as 40 of the biggest 100 companies may collapse by 2011 as their debt- strapped assets default, according to a 2008 report by Boston Consulting Group Inc.
“These guys had a sense they could do no wrong,” Paul Schaye, managing partner of New York-based Chestnut Hill Partners, told Bloomberg.. “ Now they’re going through a very sobering experience. They have to figure out how to survive this environment.”
So what will persuade dealmakers to take on added risk in such a gloomy environment? Turns out the the very things preventing consolidation now – the recession and credit crunch – could spark the revival Wall Street craves.
Only the Fit Survive
“There is going to be a need for a lot of companies to consolidate to survive,” Mark DeGennaro, managing director at investment bank Gruppo, Levey & Co. told Bloomberg. Firms with falling sales figures and credit trouble may have no choice but to find buyers – often at very low prices, he said.
Corporations with cash on their balance sheets or stronger share prices have been taking advantage of the drop in equity valuations among their rivals to do deals.
In fact, 2008 was marked by a jump in hostile or unsolicited deal activity, including InBev's (ABI) planned acquisition of Anheuser-Busch Cos. Inc. (BUD) and Exelon Corp.'s (EXC) bid for NRG Energy Inc. (NRG).
And despite the obvious risks, some private equity firms will still dip their toes in the LBO waters.
“The best returns in private equity have come in a period like the one we’re just entering,” Blackstone founder Stephen A. Schwarzman said in a speech to investors and buyout firms in Dubai in October. “This is an absolute wonderful time.”
Another traditional provider of capital – sovereign wealth funds – may also step up to the plate.
“Even though the price of oil is volatile, they have substantial amounts of money…they need to get to work and generate a reasonable rate of return,” Alan Alpert Senior Partner of M&A Transaction Services at Deloitte Touche Tohmatsu told Boardmember.com. “ .”
[Editor's Note: Overcoming the global-financial-crisis damage that we’ve watched unfold over the past year won’t be easy. After all, the damage is deep and is certain to last for years to come – years during which uncertainty will hold sway.
But what if you knew – ahead of time – what marketplace changes to expect? Then you'd be in the driver's seat – right? You'd know what to anticipate, could craft a profit strategy to follow, and could then just sit back, watching and waiting – and finally profiting from – the very marketplace events you anticipated.
R. Shah Gilani – a retired hedge fund manager and a nationally known expert on the U.S. credit crisis – has predicted five key financial crisis "aftershocks" that he says will create substantial profit opportunities for investors who know just what these aftershocks are, and how to play them. In the Trigger Event Strategist, Gilani uses these “trigger events," as gateways to massive profits. To find out all about these five financial-crisis aftershocks, and about the trigger-event profit strategy they feed into, check out our latest report.]
News and Related Story Links:
- Money Morning Outlook 2009 Economic Forecasting Series:
The U.S. Market for Deals Remains in a Deep Freeze.
M&A: Will the Recession Spark a Rebound?
- International Herald Tribune:
Mergers and acquisitions in steep slide
- Bloomberg News:
- Schwarzman Sees ‘Wonderful Time’ for Buyouts as Wealth Plunges