First came Walt Disney Co.’s $4 billion purchase of comic-book maker Marvel Entertainment Inc. Then eBay Inc. sold its Skype Internet phone unit to a group of private-equity investors. Now Kraft Foods Inc. has bid $16.7 billion to take over the British confectionery maker Cadbury Plc. This spate of big, late-summer deals has investors feeling hopeful about the prospects for merger opportunities.
After a frenzy of mergers and acquisitions (M&A) in 2006 and 2007, such deals came to a virtual standstill during the recession. The inability of companies to secure financing from struggling banks has driven down the total value of mergers and acquisitions to about $1.32 trillion through the first week of September, according to data from Thomson Reuters. That represents a 37 percent dip from the same point last year and a 56 percent decline from 2007.
Yet after a weak start to the year, M&A activity has shown glimmers of a comeback in recent weeks, a further indication that credit is beginning to trickle back into the marketplace, and that the worst economic downturn since the Great Depression is finally easing.
“I think it’s a signal that maybe things are getting back to normal,” said Paul Larson, an equities strategist at Morningstar Inc. and editor of the company’s StockInvestor newsletter. “I don’t think that we’re at normal yet, but we’re definitely headed there.”
The return of corporate deal-making would be important for a variety of reasons, according to experts such as Larson. Such activity has traditionally been viewed as a byproduct of a healthy stock market, as well as a signal that banks are willing to extend credit.
eBay’s Sept. 1 sale of Skype for around $2 billion to a group of private-equity investors came just one day after Disney’s purchase of Marvel, as well as the $5.5 billion bid by Houston-based oil giant Baker Hughes Inc. for energy firm BJ Services Co. A week later, on Sept. 8, Germany’s Deutsche Telekom AG and France Telecom SA announced they were joining forces to create the largest cell phone provider in Britain, and Paris-based Vivendi SA said it would pay about $3 billion to acquire the Brazilian telecommunications firm GVT Holding SA.
The wave of M&A deals continued this week when Avaya Inc., a maker of corporate phone systems, agreed to buy a unit of Nortel Networks Corp. for $915 million.
Several factors help explain the recent spike in M&A, chief among which is the increasing willingness among lenders to provide credit, according to Larson.
“When credit is not available, which it was not available when we were in that deep freeze, it’s very difficult to finance any sort of purchase that a company may be thinking about,” Larson said.
M&A has also been helped by rallies in the markets, as well as rising confidence among corporate board members, said Kenneth Klee, an editor for The Deal magazine, which focuses exclusively on corporate deal-making.
Companies are “acting on strategic needs that they’ve had, and which have been recognized all along,” Klee explained. “I think over the last year there was so much noise in the system, so much confusion and uncertainty, that it was difficult for them to execute these things. Now, things have stabilized enough and there’s enough clarity out there that they’re able to go forward.”
For the time being, at least, expect companies to only pursue deals that can aid such strategic needs, said Larson, as the availability of credit will nevertheless remain an obstacle in M&A.
“Companies that want to go to the credit markets to raise capital have to have a sensible deal in order to get that capital made available to them,” Larson said. “You’re not going to see the wild transformative deals that you might have had when capital was easy to come by.”
However, the recent spate of mergers may represent nothing more than an overdue blip of long-planned deals finally getting done rather than a sign of things to come. After all, until Disney’s purchase of Marvel was announced, August was on track to becoming the worst month for M&As since 1994, according to Thomson Reuters data.
And while the return of M&A may be “an indication that businesses are feeling more confidant,” according to Klee, “… it’s not unalloyed good news.”
For one, he noted, M&A does not necessarily go hand in hand with a hiring surge, and may often time lead to layoffs. In May, for example, Medtronic Inc. announced it would be laying off as many as 1,800 employees after a string of acquisitions totaling more than $1 billion led to a drop in profits for the world’s largest maker of heart devices. On Sept. 2, Danaher Corp., the maker of X-ray machines and Craftsman tools, announced it was spending $1.1 billion on a pair of acquisitions, but also cutting 3,300 people from its workforce and closing 30 facilities.
Unfortunately, such layoffs are a result of the risks inherent in the complicated world of M&A, according to Klee. The good news, he said, is “companies are getting better at managing those risks and also choosing the deals more wisely.”