The New York Times The most significant development in mergers and acquisitions in 2010 may be not what actually happened but what deal makers think happened — a return of confidence.
That sometimes fickle state of mind encouraged the first annual gain in deal-making worldwide since the financial crisis. Global dollar volume in announced mergers and acquisitions rose 23.1 percent in 2010, to $2.4 trillion, according to Thomson Reuters data. In the United States, merger volume rose 14.2 percent, to $822 billion.
Still, merger activity is far off the peak of 2007, and no one expects a return to exuberant deal-making anytime soon.
“I think that this is not an environment for excessive risk-taking,” said Robert E. Spatt, a partner with the Wall Street law firm Simpson, Thacher & Bartlett. “But we’re out of the bunker, and there’s a lot of stuff in the pipeline.”
Gordon Dyal, the global head of mergers and acquisitions at Goldman Sachs, agreed. “We don’t expect to see a dramatic upswing, but looking at our backlog, we see continued, steady growth,” he said.
Reasons for the renewed optimism include continued cheap credit, huge piles of corporate cash and gains in the United States stock market.
Private equity firms are under pressure to use their buyout money and to find exits from investments in their existing portfolios. And a number of companies that cut costs throughout the downturn are discovering that acquisitions may be their only option for growth when confronted with a stubbornly slow recovery.
Some of those factors were also in place a year ago. But a number of headline-popping deals last summer — the Australian mining giant BHP Billiton’s ultimately unsuccessful $38.6 billion pursuit of the Potash Corporation of Saskatchewan and the furious bidding war for 3Par among them — emboldened decision makers, overcoming worries over Europe’s debt crisis and doubts about the United States economy. Such ambitious deals in the last half of 2010 showed that companies were finally ready to pull the trigger on acquisitions.
“We are seeing a new breed of preparedness among corporates,” Richard Jeanneret of Ernst & Young’s transaction advisory services noted in the accounting firm’s year-end mergers and acquisitions survey. “It’s a function of sitting on the sidelines for so long, patiently watching the market, knowing where the values lie and having access to cash and credit. There is a lot of pent-up demand.”
An early sign of returning corporate confidence is a rise in unsolicited bids, which totaled 8 percent of the global merger market in 2010, Ernst & Young said.
The New York Times Another sign of optimism is the rise in premiums being offered for publicly traded companies. With the major United States market measures just returning to what their levels were before the collapse of Lehman Brothers in 2008, many companies’ stocks are seen as offering relative bargains, with bidders willing to pay substantially more than the current market value.
The industry that received the highest premiums in 2010 was the one most battered during the crisis — financials, which had an average premium of 55 percent on offers in 2010, according to Thomson Reuters data.
Still, executives and boards that are planning acquisitions will have to clear a high hurdle, bankers say.
“To be successful, acquisitions have had to be strategic, earnings-growth positive and easily understood by shareholders,” said Jeffrey Kaplan, global head of mergers and acquisitions at Bank of America Merrill Lynch. “That’s one reason why we’re not seeing the velocity of deals that we saw in 2006 and 2007.”
In the United States, energy and power was the dominant sector for deal-making, more than doubling its market share, to 28.1 percent in 2010 from 12.5 percent in the previous year, according to the Thomson Reuters data. A desire to expand in natural gas, especially in the coveted Marcellus Shale region in the eastern United States, drove a number of deals, including Chevron’s $3.2 billion acquisition of Atlas Energy.
And a $4.4 billion management-led buyout of the natural gas producer Exco Resources was among the biggest buyouts of the year.
One of the most volatile takeover battles of the year centered on the debt-laden power producer Dynegy. Shareholders, led by Carl C. Icahn and Seneca Capital, thwarted a $4.7 billion buyout offer in November by the Blackstone Group. Mr. Icahn made his own offer for the company the following month — a bid that Seneca now also opposes.
Health care was the second-biggest sector of deal activity in the United States, which was underscored by the last significant announced deal of the year: the $1.25 billion acquisition of the Medicare Part D business of Universal American by CVS Caremark that was announced on Friday.
Some of the consolidation in health care is being prompted by the changes expected under the Obama administration’s overhaul of the system. The $3.3 billion unsolicited offer from Community Health Systems for a smaller hospital chain rival, Tenet Healthcare, is largely seen as a push for scale by 2014, when regulatory changes will increase the number of paying patients.
The United States accounts for 34 percent of global deal volume. But one of the biggest themes in mergers and acquisitions in 2010 was the growth in emerging markets. In the Asia-Pacific region, deal volume jumped 43.5 percent, according to Thomson Reuters.
“This has clearly been an inflection point for East meets West,” said Paul Parker, head of global mergers and acquisitions at Barclays Capital. “Emerging markets have surged and really accounted for growth in M.&A. this year.”
Mr. Dyal of Goldman Sachs said: “Our clients are definitely taking a global perspective, and I’ve yet to meet a client who says, ‘I want to look at deals only in one region.’ “