Blitz of mergers, buyouts sets a record
Corporate merger and buyout activity is now surpassing the record levels reached in 2000 – a trend that holds some risk as well as promise for the global economy.
In the past week:
• US Airways boosted its hostile bid for the struggling airline Delta, to about $10 billion.
• General Electric Co. said it will buy Britain's third largest aerospace company for $4.8 billion. It also is looking to auction off its plastics division, which could be worth $10 billion.
• Jockeying intensified among rivals to buy Hutchison Essar, one of India's biggest wireless phone companies.
With all the stock shares and assets flying back and forth in recent months, even stock exchanges are part of the story. European regulators have just stamped their approval on a proposed merger between the New York Stock Exchange and Euronext, an operator of European exchanges. And two venerable Chicago markets for futures and option contracts are in the process of pairing up.
This wave of dealmaking is generally a positive force, analysts say. Mergers or buyouts help many businesses become more competitive – and support their stock prices in the process. But the trend also gives cause for worry. The last time mergers and acquisitions (M&A) hit a peak like this was in 2000, just before a bear market and recession of 2001. The risk is that, once again, stock prices and M&A activity could fuel each other, only to collapse after a speculative frenzy.
"Right now we're not seeing that," says Roger Aguinaldo, who publishes the M&A Advisor, a New York newsletter. "But it could happen."
What's certain is that dealmaking is back in full swing. In 2006, M&A volume worldwide reached $4 trillion, surpassing the previous record of $3.3 trillion set in 2000, according to Dealogic in New York, which analyzes global investment banking and systems. The year's final quarter, in fact, was the fastest-paced.
The trend is driven by a strong global economy, for one. Also, some CEOs feel an "eat or be eaten" pressure, knowing they could lose their jobs if their companies are bought out.
Other causes may be particular to a given company or industry. GE is buying and selling pieces to reposition itself for solid global growth. The US airline industry, analysts say, must consolidate to boost profitability.
Perhaps the biggest force behind the merger wave is the simplest: piles of money. Corporations have built up loads of cash. So have "private equity" funds, created by large investors to buy publicly traded firms, manage them privately for a time, and then relaunch them as public companies.
"We've got a good head of steam," says Joseph Quinlan, chief market strategist at Bank of America Securities in New York. "There's a lot of liquidity out there still."
This is true globally, not just in the US. In half of the 10 biggest transactions of 2006, neither the target nor the acquiring company was from the US, Dealogic reports. Meanwhile, M&A by developing nations nearly doubled in the past year, to half a trillion dollars in value, says Mr. Quinlan.
While some financial experts predict another record in 2007, he says merger activity will probably begin to trail off in the second half of the year. "My hope is it kind of rolls over gently, [that] it doesn't crash," Quinlan says. He expects that the world's central banks will withdraw easy credit conditions before the passion for mergers gets out of control.
The recent dealmaking hasn't generally aroused antitrust concerns. Most industries are competitive. But as the trend continues, consumer protection could become more important. In 2003, for example, an academic analysis of banking mergers found that consolidation has hindered small-business access to loans.
Still, deals in this current period tend to be, on balance, beneficial, many analysts say. The economy "seems to be less vulnerable to excess than, let's say, the late 1990s or 2000," says Pavel Savor, a finance expert at the University of Pennsylvania's Wharton School in Philadelphia.
One reason: Cash-only transactions are now the norm, accounting for three-fourths of the M&A volume last year, according to Dealogic. Dealmakers tend to be more disciplined when using cash than stock, analysts say. Also, corporate directors feel greater pressure to be alert on shareholders' behalf – at risk of being sued.