M&A Stumbles in March

Despite the proposed takeovers of Dell and Heinz, dealmaking on track for worst month in more than three years.

While the proposed takeovers of Dell Inc. and H.J. Heinz Co. dominated headlines in the first quarter, global dealmaking stumbled, with March on track to be the worst month for mergers in more than three years.

Takeovers fell 4.4 percent from a year ago and 36 percent from the previous quarter to more than $461 billion, according to data compiled by Bloomberg as of March 27. Berkshire Hathaway Inc.’s $23 billion purchase of Heinz and the $24.4 billion buyout of Dell Inc. in February failed to spark a rally in March, when mergers shrank to $100 billion, on track for the worst month since 2009.

Concern about U.S. spending cuts, leadership changes in China and persistent sovereign debt problems in Europe are weighing on executive confidence, said Mark Shafir, global co-head of mergers and acquisitions at New York-based Citigroup Inc. Still, record cash piles and global equity markets at an almost five-year high are pushing more companies to weigh acquisitions to lock in growth before interest rates rise.

“There is still a lot of hesitancy among corporates to do big deals,” said Henrik Aslaksen, global head of M&A at Frankfurt-based Deutsche Bank AG. “There is a psychological barrier, but there is no doubt that the dialogue and intensity are increasing.”

Verizon Communications Inc. and Vodafone Group Plc are working to resolve their joint ownership of Verizon Wireless this year, weighing options from a full merger to Verizon’s takeover of the mobile venture, people familiar with the matter said this month. A sale of Vodafone’s stake in the wireless alliance alone could be valued at about $115 billion, based on analysts’ estimates, the biggest deal in more than decade.

While “massive deals are exceptions,” the rally in stock markets may help coax more CEOs into action, said Steve Baronoff, chairman of mergers and acquisitions at Bank of America Corp. in New York. It may also drive private-equity firms to strike leveraged buyouts valued at more than $10 billion.

The MSCI World Index, a gauge of stocks from 24 developed markets, rose this month to its highest level since June 2008, and the Dow Jones Industrial Average climbed to a record in March. Meanwhile, a measure of volatility in U.S. stocks known as the VIX declined to the lowest in six years.

Dell this week attracted proposals from Blackstone Group LP and Carl Icahn to rival founder Michael Dell and Silver Lake Management LLC’s buyout offer, opening up an unexpected bidding war for the struggling personal-computer maker.

 

‘Transformational Deals’

“The ability to do big transformational deals exists,” said Chris Ventresca, New York-based JPMorgan Chase & Co.’s North American head of mergers and acquisitions. “The size of a deal is not a constraint -- the ability to do large deals will be here for the rest of the year.”

While conditions for dealmaking are favorable -- with companies sitting on more than $4 trillion in cash and interest rates at record lows -- takeovers have been slower to recover than in previous slumps, Citigroup’s Shafir said at a mergers and acquisitions conference in New Orleans last week.

Deal volumes soared as much as 25 percent after the drop in mergers in 1990 and 1991, and jumped 40 percent after the 2002 trough, Shafir said, citing data compiled by Citigroup. By comparison, takeovers rose 3 percent following the downturn in 2011 and were down 2 percent last year, according to the presentation.

“We are not getting the feeling we are in a sustained upturn,” Shafir said. “March is a bit disconcerting.”

North America was the only region to record an increase in dealmaking in the quarter, compared with the year-ago period, with takeovers rising 22 percent to about $225 billion, data compiled by Bloomberg show.

“The U.S. economy feels good, Corporate America feels good and business activity is picking up,” Gregg Lemkau, co-head of global M&A at Goldman Sachs Group Inc., said in a Bloomberg Television interview today. “The biggest trend we’ll see this year is U.S. cash being put to work elsewhere.”

In Europe, the Middle East and Africa, transactions fell 13 percent, while they slumped 29 percent in Asia. All three regions posted a decline in dealmaking from the fourth quarter of 2012, the data show.

Deals in the EMEA region slumped to $147 billion amid a flare-up of the sovereign-debt crisis. Cyprus barely dodged a disorderly sovereign default and unprecedented exit from the euro this month, while Italy’s political system is gridlocked after inconclusive election results in February.

 

Bumps in Road

“There can always be bumps in the road to the recovery like the situation in Cyprus,” said Giuseppe Monarchi, co-head of Europe, Middle East and Africa M&A at Credit Suisse Group AG in London. “If equity markets continue to rally and the European macro situation stabilizes, that should create a more conducive environment for M&A, but the market is still fragile.”

D.E Master Blenders 1753 NV, the coffee and tea company spun off by Sara Lee Corp., said today it’s in talks to be acquired by a group led by Joh. A. Benckiser in a transaction that values the company at $9.7 billion. Liberty Global Inc., which is controlled by billionaire John Malone, also bought 12.7 percent of Dutch cable-television operator Ziggo NV from Barclays Plc. Those first-quarter deals may help bring acquisitions of Dutch companies to the highest level in four years, according to data compiled by Bloomberg.

Tele2 AB’s Russian mobile-phone unit this week became the object of a potential bidding war between billionaire Mikhail Fridman’s Alfa Group and state-controlled lender VTB Group.

Chinese buyers announced more than $26 billion in transactions, the least since 2009, after the country shuffled ministers and executives at state-owned companies during its once-in-a-decade leadership change, which culminated this month with Xi Jinping taking over as president. China National Petroleum Corp.’s $4.2 billion purchase of a stake in Eni SpA’s African natural-gas assets was the largest deal in the quarter.

“The political transition has reduced transactions, and until those appointments get bedded down, the risk appetite and the willingness to embark on deals will be held back,” said Joseph Gallagher, co-head of M&A for Asia-Pacific at Credit Suisse in Hong Kong. “Greater China will be slow, and Greater China is the biggest piece of the puzzle.”

Suitors globally may start to take courage from the U.S., where improving job prospects have helped bolster consumer spending, which accounts for the bulk of the world’s largest economy. Shoppers, who spent even as fuel costs rose and a payroll tax increase ate into take-home compensation, are likely to keep buoying the economy, according to economists.

 

Economic Growth

Consumer spending may have risen by 0.6 percent in February,the most in five months, according to the median of estimates in a Bloomberg survey before the release of Commerce Department figures. The U.S. economy added a net 236,000 jobs in February, almost double the number added in the previous month.

“All the right ingredients are in place for a strong M&A market,” said Paul Parker, global head of M&A for Barclays Plc in New York. “This early start with large, transformational deals is the bellwether.”

Activist investors may also encourage dealmaking as they push companies to put cash to work, said Andrew Bednar, a partner at Perella Weinberg Partners LP in New York.

“Activists are influencing companies that are in their strike zone,” Bednar said in an interview. “These companies are thinking about what to do with the cash and when to do it -- they are looking for ways to head off the activists.”

Lobbying from ValueAct Holdings LP led to the proposed $3.7 billion sale of Gardner Denver Inc. to KKR & Co. this month, while Ralph Whitworth’s Relational Investors LLC and billionaire investor Nelson Peltz helped effect asset sales at Illinois Tool Works Inc. and Ingersoll-Rand Plc respectively.

Some companies may be emboldened to act before borrowing becomes more expensive. The yield on 10-year Treasury notes, a benchmark for everything from corporate bonds to mortgages, is forecast to rise to 2.64 percent by mid-2014 from less than 1.9 percent now, according to the median estimate of more 50 economists and strategists surveyed by Bloomberg. That has the potential to add about an extra $7.5 million a year in interest to every $1 billion borrowed in the corporate bond market.

“There is water accumulating behind the dam,” said Bob Eatroff, Morgan Stanley’s co-head of Americas M&A. “The desire to do M&A doesn’t go away. It kind of builds and builds over time. Confidence will be there, and we will see a quick acceleration in M&A volume.”

 

Bloomberg News

 

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