Corporate Mergers and Buyouts Heating Up

Corporate mergers and acquisition (M&A) activities are perking up, especially in the real estate, energy and power, and advanced technology sectors.

Also, analysts are predicting that the automotive sector will come back stronger than before the economic crisis.

Overall, M&A dealmakers suggest that 2010 will be a productive year for acquiring companies, but it still won’t come close to the record-breaking 2006 in numbers or value.

Companies have hoarded cash through cost cutting, reduction in force, and slimming down since the onset of the economic crisis. Traditional growth has taken a backseat to acquiring new companies over the past 20 years.

Liquid assets are not used to improve existing operations, but to support M&A. “Much of this money is overseas, and the tax implications for offshore deals are favorable. Among the companies involved: Microsoft and Cisco with $40B each, Google with $33B, and Oracle with $25B,” according to Beyond the Arc, a business analysis website.

A main driver in the M&A sector is increased confidence by investors, given the uptick in the credit markets, improved technologies, increased productivity, and more clearly defined regulations.

“Although the deal volume flatlined for the year that ended November 2010 as compared to 2009, deal value rose nine percent to $786 billion from $722 billion,” according to a report on the Big4 website.

During 2010, a total of 106 deals were completed in the U.S. and 74 deals are still in the pipeline.

After the third quarter, global M&A activity increased by 6.8 percent over the second quarter in 2010, representing a value of $599 billion. When compared with the third quarter in 2009, M&A activity jumped by 25.6 percent.

“The M&A market is continuing to roar. And with Q3 2010 M&A preliminary figures now out, the evidence is more than anecdotal,” according to an article on the Risk Watchdog website.

U.S. dealmakers have taken the lead and represent 34 percent of all global activities. Emerging markets are outpacing Europe when it comes to M&A activities, but they rarely leave the confines of the European market.

Europe’s M&A activities took a nosedive and dropped by 15 percent or $25 billion during the third quarter in 2010.

“Europe’s poor M&A performance is in fitting with BMI’s [in]-house view that the eurozone is set to remain the weak link in the global economy going forward. In Europe, dealmaking came off the boil in Q3 2010,” according to the Risk Watchdog article.

U.S. M&A Activities Dissected

“The downturn in the credit cycle from mid-2007 through mid-2009 had a tremendous impact on both the overall volume of U.S. strategic M&A transactions and the contractual devices employed by deal makers,” according to a study on lessons learned during the economic crisis by the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP.

M&A dealmakers experienced a relaxation in the credit market, but a decline in the dollar amount of the deals made—from $425.4 billion to $313.4 billion between July 2010 and July 2009, when compared to the 2008 and 2007 period.

During the past three years, firms involved in M&A activities discouraged any other firm from partaking in the takeover of any company slated for M&A. M&A participants demanded increasingly more breakup fees, topper fees, or reverse breakup fees. The only overriding reason for a firm not to call for the fees is related to the fiduciary responsibilities of the target board of directors.

Breakup fees require the firm to be purchased to pay a large sum of money to the investment company if it should agree to be purchased by another company. The topper fee is a penalty fee if the purchaser is another company that offered a higher purchase price. The reverse breakup fee requires the investment firm to pay a penalty if it can’t put together the financing for the acquisition, and thus the deal falls apart.

 

Continued on the next page...

Such fees, along with the reputational impact of failed deals, make M&A a high-stakes game.

Cash deals have taken a backburner to accepting stock ownership, given that a company might become less liquid.

“The higher use of stock consideration may also suggest that acquiring companies believed that stock prices had stabilized and accurately reflected the underlying value of their businesses,” according to the Paul, Weiss, Rifkind, Wharton & Garrison study.

There were no “merger-of-equals” during 2009. The researchers suggest that former profitable companies had lost market share. With the deterioration of financial indicators, it made a company vulnerable to takeover.

“The dominance of pure acquisitions indicated that the credit crisis had created ripe conditions for opportunistic transactions by separating strong firms from weak ones,” said the researchers in the Paul, Weiss, Rifkind, Wharton & Garrison study.

Slim Years for M&A Activity

Merger-related activities have been tepid since 2007 due to the onset of the global economic crisis. During 2009, international M&A activities declined by 56 percent from the prior year, from over $1 trillion to $454 billion.

Organization for Economic Cooperation and Development (OECD) countries curtailed M&A activities significantly during 2009.

“However, it was also due to the fact that major emerging economies, which enjoyed strong international investment performance in 2008, suffered their first sharp declines in 2009 with respect to both outward and inward M&A activity,” according to an Investment News article by the OECD.

The year 2008 saw a 30 percent increase—from $96 billion to $121 billion—in global M&A activity by firms based in Brazil, China, India, Indonesia, Russia, and South Africa. The trend reversed in 2009, and M&A activities dipped to $46 billion, a 62 percent decline.

Acquisitions Completed in 2010

Technology firm 3M Co. completed the acquisition of Cogent Inc. at the beginning of December, with Cogent stockholders being paid $10.50 per share.

“Adding Cogent’s technologies—in finger, palm, face and iris biometric systems for governments, law enforcement agencies, and commercial enterprises—to our business is a significant strategic addition to our security credential issuance and authentication product portfolio and service offering,” said Mike Delkoski, 3M vice president, in a statement.

On Dec. 3, Carlisle Companies Inc. took Hawk Corp. into its fold by offering $50 per share. The merger could be consummated as no antitrust violations were found.

“Early termination of the HSR [Hart–Scott–Rodino Antitrust Improvements Act of 1976] waiting period confirms that the applicable HSR Act filing and waiting period requirements with respect to the previously announced tender offer and proposed merger have been satisfied,” according to a Carlisle November press release.