Glencore International Plc’s $41 billion purchase of Xstrata Plc, the biggest takeover in almost three years, may help restore confidence in dealmaking amid evidence global economic turmoil is subsiding.
Glencore’s proposed takeover, the biggest mining transaction ever, is the latest sign executives are becoming bolder after mergers and acquisitions in January slumped to the lowest level since August 2009, the slowest start to a year in almost a decade, according to data compiled by Bloomberg.
While takeovers are down 29 percent from a year ago, encouraging economic data from the U.S. and progress in European debt talks may unleash pent-up demand for acquisitions, bankers say. European buyers have accounted for 43 percent of this year’s M&A volume, and keeping that pace would snap a four-year decline in Europe’s share of global transactions, Bloomberg data show.
“Corporates are as hungry for growth initiatives as ever,” including transformational deals and divestitures of slow-growing divisions, said Christopher Ventresca, co-head of M&A for North America at JPMorgan Chase & Co. in New York. “As people feel more stability and less systemic risk, they will be more comfortable announcing both of those types of deals.”
The Glencore-Xstrata deal followed ABB Ltd.’s agreement on Jan. 30 to buy Thomas & Betts Corp. for $3.9 billion to expand its North American distribution network and boost sales of low-voltage power equipment. Roche Holding AG is offering $5.7 billion in a hostile bid for Illumina Inc., a provider of gene-mapping equipment and services. Eastman Chemical Co. announced a $3.38 billion acquisition of Solutia Inc. on Jan. 27.
The purchases have coincided with more positive news on the economy. The U.S. jobless rate unexpectedly dropped last month to the lowest level in three years, and the Commerce Department disclosed on Jan. 27 that gross domestic product climbed 2.8 percent in the fourth quarter, the fastest pace since 2010. In Europe, Greece’s government and international creditors are working on the final draft of an agreement that would help free up a second aid package. The MSCI World Index had rebounded 19 percent through yesterday from an Oct. 4 low.
Metals, mining and coal were some of the busiest sectors for takeovers last year, comprising about 8 percent of transactions, or about twice their historic share, according to data compiled by Bloomberg. Deals in those industries amounted to $179.5 billion, the most since 2007.
BHP Billiton Ltd., facing a new threat from a combined Xstrata and Glencore, today said it has the capacity to continue making acquisitions. BHP may target the copper, potash and energy sectors, Chief Executive Officer Marius Kloppers said in August.
Oil and gas and information technology also led M&A last year, making up for fewer takeovers in telecommunications and financial services.
Not Only Mining
“The consolidation will probably continue, not only in the mining space,” said Matthias Fankhauser, a fund manager at Clariden Leu in Zurich, which oversees about $100 billion in assets. The Glencore deal “will encourage other companies to think the same. They now realize that size matters, as all companies are trying to get volume and protect their margin. It’s easier to do so when you are big.”
More large deals may be coming. Nestle SA and Danone SA made first-round bids for Pfizer Inc.’s baby-formula business, people with knowledge of the process said in January. That division of the New York-based drugmaker may fetch as much as $10.5 billion, people familiar with the situation said last year.
AMR Corp.’s American Airlines, a takeover target now that it’s in bankruptcy, has attracted interest from Delta Air Lines Inc. and US Airways Group Inc. this year, people with knowledge of the matter said last month.
Yahoo! Inc., the largest U.S. Web portal, is examining a sale of its Asian assets, which include stakes in Alibaba Group Holding Ltd. and Yahoo Japan Corp., people familiar with the matter said this year. The company, whose market value is approaching $20 billion, was also in talks with buyout firms about selling a minority stake in itself, the people said.
Technology takeovers may again boost M&A this year as companies such as Cisco Systems Inc. hunt for acquisitions that will increase their capacity to provide new storage, analytics and security services to enterprise customers. Hewlett-Packard Co., Google Inc. and Microsoft Corp. led a 38 percent gain in technology deals last year, outpacing an advance of about 3.7 percent for all of M&A worldwide, Bloomberg data show.
“M&A activity is certainly on an upward trend from a desperately low level late last year,” said Will Jackson-Moore, U.K. transactions leader at PricewaterhouseCoopers in London. “Still, corporations are showing a lot of restraint and they will remain very selective about opportunities. They want to protect their balance sheets, which is one of the reasons balance sheets are as strong as they’ve ever been.”
The biggest 1,000 companies globally are sitting on almost $3.5 trillion of cash and equivalents, up 12 percent from a year earlier, according to data that excludes financial-services firms.
Regulatory hurdles may still be a concern for executives looking at transformational deals after AT&T Inc. was forced to abandon efforts to buy wireless operators T-Mobile USA for $39 billion in December. Deutsche Boerse AG and NYSE Euronext terminated a merger agreement that would have created a $26 billion transatlantic exchange group on Feb. 2, a day after European antitrust regulators rejected the combination.
The U.S. Federal Trade Commission, meanwhile, is reviewing Express Scripts Inc.’s $29.1 billion offer for Medco Health Solutions Inc., which would create the largest U.S. manager of pharmacy benefits for employers, insurers and union health plans.
To gain more confidence, companies may still need to see a big deal in an industry that has been sluggish, said Scott Moeller, a professor in the practice of finance at Cass Business School in London, who is a former M&A banker at Deutsche Bank AG and Morgan Stanley.
“There is going to be a trigger event that kicks off the market, where people say, now it’s time and if people begin to think now is the time to act, we could see a resurgence,” Moeller said.