Commentary
Has the M&A market returned? Can we start harvesting the green shoots already?
What a change a few months makes. Everyone comes back from the summer holidays and the M&A market is once again alive and making front-page news. Looks as if some people didn’t take their holidays this year:
- US: Disney spends $4bn to purchase Marvel Entertainment, home to the Incredible Hulk and Spiderman, their biggest purchase since Pixar Animation in 2006 for $7.4 billion. eBay sells 65% of Skype for just over $2 billion to an investor group, and this was even a deal where the cash portion was 96% of the consideration with the venture capital industry putting up the money for the purchase.
- Trans-Atlantic: Kraft makes a bid for Cadbury. Hershey hires J.P. Morgan to consider a ‘white knight’ counter bid for Cadbury.
- Europe: The mobile phone market in the UK sees Orange and T Mobile proposing a merger , and no one even suggests that this could have competition concerns when their combined market share would be over 30%!
What’s happened? For anyone following the market closely, actually the market has never been dead. Yes, there were many deals withdrawn (but we recently looked at this, and although there were high profile deals that may have been pulled, only 2% of deals actually were!). Other deals were delayed (and it’s difficult to tell how many were postponed, but anecdotal evidence would indicate quite a few: but at least postponement isn’t cancellation!).
Advisors were working on deals, and the pipeline is large with many CEOs waiting for the time to pounce. These are often acquisitions that had been designed in their strategy departments (or in their own heads) over the past 18 months, but are only seeing the light of day now.
The demand for deals just doesn’t disappear anymore. 2008 saw a dearth of new deals but the first half of 2009 may ultimately be consider the low point: in 2009 in the US, the M&A market was 42% lower than the already depressed 2008. This period still had levels of deals (both in terms of numbers and value) that were way above the market lows earlier in this decade and many times greater than the peaks only 20 years ago. Fundamentally, companies need to do corporate combinations at all levels in order to compete in today’s global economy.
Even in a recession this need doesn’t disappear. Many companies and some industries need to restructure. And one company’s acquisition is another company’s sale of a division – as the seller needs to raise money for the core divisions, or, as in the case of eBay above, a refocus on the core).
Of course, the M&A market is highly reflective of the general economy, and for particular companies and industries, the general conditions for that industry. There is a ‘halo effect’ from the overall economy, because the confidence to do a major acquisition declines as overall confidence levels decline with company sales and the malaise in the world in general (as reflected in the news everyone hears on the television, in the press and when talking to friends, neighbours, customers and suppliers). This means, of course, that the M&A market will recover – as we’re seeing – as the economy recovers. Our analysis at Cass Business School shows a lag of a quarter or two in this increase, so it is to be expected that we’re seeing more than just ‘green shoots’. In the M&A market, ‘green shoots’ are the advisors’ strong pipelines, but they can ‘harvest’ the deals when they start happening with a pace we’ve only recently seen again.
Debt financing will also reappear, as will be the subject of a future blog entry.
We hear about ‘green shoots’ in the financial press all the time these days. I believe that the M&A market now beyond that phase? In fact, do you ever really have ‘green shoots’ at all in M&A (except for the advisors), or does the M&A market spring to life quickly like weeds, where it seems as if the dandelions come up within a day or two after you’ve mown the lawn?
Read Full Post | Make a Comment ( None so far )‘Green shoots’ in Global M&A
It seems that you can’t read the business new these days without hearing about the ‘green shoots’ in the economy and whether the recession (or depression, if you happen to be someone losing your job) is going to be over soon. Back in the springtime, Federal Reserve Board Chairman Paul Bernanke started seeing these ‘green shoots’, and President Barack Obama talked about ‘glimmers of hope’. Check out this article from Bloomberg that talks about one of the growth industries of 2009 being the use of the term ‘green shoots’!
There are doubters about the economy, of course. Lots. But one can’t deny that the stock markets have at least improved since the Springtime, and with it business confidence for many industries.
But how about M&A. I am talking to dealmakers, journalists and advisors daily in the M&A arena. And here it’s a mixed bag as well. But ‘green shoots’?
First the facts. It’s been widely reported that the first half of 2009 was the worst in ages (five years by most people’s count) for M&A deal volumes. The mainstream news even reported this, whereas they usually don’t report about M&A deal volumes at all (see the Fox News coverage here as an example of one new channel’s reporting last month). As for July? Check out the excellent Wall Street Journal Deal Journal blog on July volumes being a new low. So any springtime M&A green shoots seem to have withered in the summer heat.
Or have they?
Not that I want to be seen as being overly optimistic, but I think the sentiment in the market is stronger than the July and August figures show (yes, August won’t set any volume records on the high side either, it seems). Dig deeper. Not green shoots, but strong roots. More industries being active (not just pharmaceuticals and extractive industries as earlier in the year with the high-profile mega deals, but activity now in the technology sector, professional services, retail, industrials, energy and telecoms). M&A advisors are busier — and not just with post-merger integration work from deals closed in 2007 and 2008 (which was much of the activity earlier in 2009). Even the airlines serving businessmen and businesswomen are seeing upticks in traffic.
It’s happening. Bernanke and Obama may have prematurely called the end of the downturn in the M&A market (and in all fairness to them, they were talking about the overall economy, and not the M&A market), but now it may finally be true.
I’d be interested in hearing if others share the feeling…
Read Full Post | Make a Comment ( 1 so far )Distressed and bankrupt acquisitions: Should you do one of these deals?
The answer to the question above? Absolutely ‘yes’. That is, If you’re the distressed seller. And if you are the distressed seller, you may have no choice anyway if you’re actually already bankrupt, insolvent or moments away from being so.
The answer for distressed sellers is easy. Sell. But for buyers the answer is more complex.
Cass Business School’s M&A Research Centre (of which I’m the Director) recently completed a very comprehensive study of distressed and bankrupt / insolvent M&A deals (with the sponsorship and support of the law firm Allen & Overy, investment bank Credit Suisse, accountancy and advisor Deloitte and the Financial Times / Mergermarket). In comparing those types of acquisitions with healthy ones, the study looked at over 12,000 deals, including 2652 distressed targets and 265 bankrupt / insolvent ones. The study period spanned 25 years from 1984 through 2008. It focused on strategic deals, and excluded so-called ‘financial sponsor’ deals (typically done by private equity firms). Details of the study (including definitions used to define a company as ‘distressed’ are included in a full report that can be ordered here).
Unfortunately for the buyers, ‘buying cheap’ does not guarantee higher returns to shareholders, except in the time immediately around the announcement of the deal. Thus, the market appears to like these acquisitions initially when announced, but then the bloom comes off the rose as the hard work of saving — in fact integrating — the target begins. Interestingly, as is commonly known, the typical M&A deal announcement results in an immediate decline in the purchaser’s share price (which is confirmed in this study), so at least purchasers of a distressed or bankrupt company get a better initial reaction.
Longer term, whether they bought a distressed or bankrupt company, the study found that the performance of the purchasers declined,. This was measured by looking at a number of financial factors, including return on equity. Thus it appears that these deals didn’t meet their expectations. Caveat emptor. Let the buyer beware. As with all purchases in life, if it looks like too much of a bargain, there’s probably something wrong with it that you don’t know yet.
There were some other interesting findings in the study:
- If a target is distressed, it is more likely that the acquirer will be from the same industry (a competitor) than for healthy acquisitions. It does seem as if there’s at least some attempt by those who know the industry well to try to save a company that’s had problems, although perhaps in light of the finding about long-term success, perhaps this is a case of hubris or misplaced confidence.
- There was an interesting geographic difference: the US and UK stock markets react differently to acquisitions of distressed targets. There is insignificant or even negative immediate reaction in the UK to the buyer’s share price when they announce a deal involving a distressed company, but in the US the opposite is true. The UK shareholders appear to have made the correct decision!
Lastly, and critical to today market situation, the study found that the best time to strike a deal for a bankrupt target is just after a major crisis (such as we have right now) when the markets are starting to recover. In these times, both the acquirer and target show gains.
Read Full Post | Make a Comment ( None so far )‘How to survive the maelstrom of a company merger’ (Financial Times)
In the Financial Times of 30 June 2009, columnist Stefan Stern wrote an article about how to survive a merger, having in hand an advance copy of my new book: Surving M&A: Making the Most of Your Company Being Acquired.
Gratifying to see Stefan Stern’s suggestion that ”…we should be grateful that Scott Moeller…has picked this moment to publish a useful new book.’
He goes on to agree that everyone in two merging companies needs to be thinking about their future as possibly uncertain, that talent doesn’t necessarily mean you’re a personal winner and nor does seniority (in fact, in the latter case, it works against you), and that there are ‘strange, disingenuous things’ said during the deal.
As Stefan Stern said in the article: ‘M&A can be fraught and filled with potential hazards’. Exactly! Which is why a proper defensive — or even offensive — plan is needed by each and every employee.
Anyone with any examples of the above? Please comment on our companion weblog, Surviving Mergers!
Read Full Post | Make a Comment ( Comments Off on ‘How to survive the maelstrom of a company merger’ (Financial Times) )M&A premiums: What’s happening?
Just last month, Liam Vaughan at Financial News wrote about increasing M&A premiums as ‘buyers in the M&A market are being forced to pay more over and above a takeover target’s share price than they have for nearly a decade.’ According to Dealogic, Liam said the average one-month premium last month was 29.5%, up from 24.1% the previous quarter and 24.3% for the same quarter last year. He quoted me saying the following: ‘Corporates don’t want uncertainty in today’s market which is why they go for a bear hug offer to ensure recommendation from the board…’
Now, one month does not a trend make, but this is certainly much higher than the 2007 average premium of 21.2%.
He also quoted me (sorry, their website is subscription only, but if you have a subscription, the link is here):
‘Scott Moeller, director of M&A research at the Cass Business School, said: “Strategic buyers with cash are able to make acquisitions on a longer-time basis. They also don’t want to enter into a protracted offer period so will go for a bear-hug [higher and pre-emptive] offer to ensure a recommendation from the board.”’
This is all the more interesting because of the relative lack of financial buyers in the current market competing for targets (and therefore driving up deal prices). One would normally think that the disappearance of a substantial group of buyers (the private equity and venture capital firms) would cause premiums to decline.
Then, just last week, Liam again wrote about this topic (once more, if you have a subscription, the article is here), using data from a recently released JP Morgan M&A report which had also noted the increase in premiums recently. The JP Morgan study found that the premium (offer price over share prices one month earlier) were 23.8% in 2007 (yes, different analysts come up with differnt figures, but at least this isn’t too far from the other figure for 2007 above) and notes that the 2009 year-to-date figure is 29.8% (fortunately, remarkably similar to the figure above for May 2009).
Interesting in the JP Morgan study, the one-day premium figure for 2009 year-to-date is 32.7%. This one-day figure for 2009 is higher than the one-month premium. Usually, it is lower (or 2007, for example, the one-day premium was only 16.6%). Why is it usually lower? Two reasons are normally given: 1) that there are leaks to the market either intentionally or not (including outside observers who are correctly ‘guessing’ that two companies are in talks with each other) and 2) that the markets in industries with a lot of M&A activity are normally on the upswing (as was certainly the case through much of 2007, the year of the last M&A market peak).
So why is the one-day premium in 2009 HIGHER than the 30-day premium and therefore different from the typical experience? I believe this is a reflection of the declining stock markets for much of this period – as the deal prices are usually set well before announcement date, and at least by a week or two if not longer. Therefore, in 2009, the price was set but then by announcement date the target’s share price had declined some more.
The declining market also offers another reason for higher premiums at a market low, such as we have now. The relative bargains for such companies makes it easier for healthy companies to afford to buy the targets, and especially if the acquisition was part of a long-standing plan to make the purchase, and the buyer is opportunistically making the purchase now that it is available at a cheaper price than they ever had imagined possible.
I’d be interested in hearing any other ideas as to why premiums are up year-to-date, and whether anyone believes they will decline yet again in the next merger wave as the stock market comes back.
Read Full Post | Make a Comment ( None so far )M&A Tipping Point
Are we at the tipping point where we are back into a more robust M&A market?
Just look at yesterday’s headline in the Financial Times: ‘M&A springs back to life’. Reporting on three mega-deals (Oracle’s agreement to buy Sun Microsystems for $7.4 billion, PepsiCo’s offer of $6 billion to buy out investors in its two biggest bottlers and GlaxoSmithKline announcement of a $3.6 billion purchase of Stiefel Laboratories), it really did look like a ‘Merger Monday’ … evoking memories of many a ‘Merger Monday’ back in the heyday of 2006 and 2007.
I was at an M&A breakfast this morning sponsored by CriticalEye and Accenture, and not only did the event start with the moderator showing yesterday FT headline, but the general concensus was the FT was reporting something that market practitioners had been seeing for a while, at least for strategic deals. (Notably, there was some disagreement about private equity deals.)
There certainly seem to be more bulls now than bears amongst the people in the M&A market that I see. The backlogs on deals is not getting smaller anymore, even though financing for deals is still tight and deals continue to be cancelled that had been many months in the making.
Whereas only a few weeks back, the general concensus was that the reviving M&A market was limited to a relatively small number of industries (led by pharmaceuticals — sse the post here of a few weeks back), now there appears to be activity in a number of industies. Although, I must admit, despite the Oracle / Sun deal, relatively few in the technology sector for the moment. Deals also don’t appear to need the government to make them happen, as we had in financials last year.
Are we at the tipping point? Before answering, do note that The New York Times reported on 29 October 2008 — almost six months ago — in a similarly entited article (‘The Tipping Point? Merger Deals Could Be Ray Of Hope’) that M&A might be leading the overall equity markets out of their bottom.
Read Full Post | Make a Comment ( None so far )M&A Advisors and the New World Order
There’s been a lot written recently about the impact of the downturn on the rankings of the major M&A advisors: much has been made of the drop of Goldman Sachs from the premier position to be overtaken by JP Morgan and Morgan Stanley, and the appearance of Evercore Partners in the top 10 (really in their case on the back of credit for one deal — albeit the largest of the first quarter — where they advised the pharmaceutical giant Wyeth in its $64.5 billion acquisition of Pfizer; overall Evercore only did three deals in the quarter versus UBS’ 44 who were in the position just above them in the league table).
Is it really a new world order of M&A advisors, or just ‘business as usual’? I think the latter.
Of course, one quarter does not a year make. But a number of analysts have noted that the firms who have taken large sums of government money (Bank of America Merrill Lynch and Citigroup) went down in the league tables: yet note that they didn’t drop much and are still firmly in the top 5. Credit Suisse had a nice increase of two spots, but otherwise the list looks pretty much the same as it always does.
Nevertheless, there are lots of reports of banker poaching. Again, what these reports seem to ignore is that this is ALWAYS the time of the year when people move — after bonuses are paid (even if this year the bonus season was missing). In fact, I would suggest that the poaching of bankers from one firm to another is not necessarily a sign of lack-of-health at some firms and vigour at others, but more a sign that the entire M&A market is beginning to stabilise, with perhaps signs of the long-awaited uptick.
Particular note has been made of departures at Merrill Lynch following its acquisition by Bank of America. But put this in perspective, too. Go back almost 10 years to the acquisition of Bankers Trust (with it’s M&A crown jewel of Alex Brown) and look at the news reports of people departing after the acquisition by Deutsche Bank. Yet Deutsche is today solidly amongst the top 10 M&A advisors consistently.
Read Full Post | Make a Comment ( 2 so far )First Quarter M&A Deal Volumes 2009 — Good sign?
Can we see the light at the end of the tunnel? I think I can.
The deal volumes for the first quarter were not bad. Not great, but the fact that they weren’t bad is a good sign. Just as in the housing market, when the declines end, that’s taken to be the start of the new bull market. Of course, it’s too early to predict an upturn in the market (whether M&A — on which I am happy to offer an opinion — or the real estate market — about which I would not opine). But there’s hope where none existed before.
Why am I confident in saying this, and having it posted here for posterity? It isn’t just the deal volume of the first quarter (nicely reported in the Financial Times here on 29 March 2009) at $525 billion with the FT headline ‘M&A starts year with 36% fall’. Yes, this was down over a third from the already-depressed levels of Q1 2008. But if this ‘depressed’ level continues for the year (that is, if you annualise the first quarter), then you get a total year level of $2.1 trillion. A respectable level that still would put 2009 in the top 10 years of M&A ever, and well above the 2002 trough of $1.2 trillion. Now THAT was a depressed level.
This does bear noting. Peak (1999) to trough (2002) in the last merger wave was down 72%. If 2009 really is the trough following the last peak (2007), then the decline is ‘just’ 55%. Not, as I’ve written last year, Armageddon. Not pleasant for the market, but there are other financial markets that have been hit much worse.
In the past several weeks, I’ve been speaking to a lot of practitioners in the M&A markets here in Europe. They have longer and larger backlogs than several months ago. They are beginning to think about hiring, and some actually are selectively adding to their teams (usually when they can get someone from one of the larger M&A firms who are struggling because of reasons other than their M&A deal volumes). No one has been talking about another round of redundancies or a reduced backlog of deals. Now…THAT’s encouraging.
And other analysts are seeing the same thing. Regent, a boutique technology M&A advisor here in Europe, wrote a report that shows in their sector that the ‘nadir’ was in November last year.
Anyone else seeing the light at the end of the tunnel?
Read Full Post | Make a Comment ( None so far )Great: A big deal! Merck / Schering-Plough
It’s nice to see that I can hold my head up high in my Mergers & Acquisitions classes again and say that the M&A market isn’t dead … despite many obituaries having been written recently by many in the press.
I was teaching Mergers & Acquisitions with a group of non-executive directors in the healthcare industry earlier this week. It’s been a long time of teaching since I’d been able to discuss a current deal with my class. Thank you, Merck. I have a new class of MBA students that starts on Thursday of this week and it is great that I can kick off the class with some discussion of a front-page mega deal.
The news was that earlier this week, Merck announced a mega-deal in agreeing to take over it’s rival Schering-Plough for $41 billion. This was the second big global pharmaceutical deal in six weeks (following Pfizer’s $67 billion purchase of Wyeth). Do two deals make a trend?
Why does this make me so happy? Simple. The deal made the front page of the Financial Times (see the story that appeared on the front page 10 March 2009 here). I could hold up the paper in class and say ‘See, here’s a deal that we can discuss.’ Current deals are always more fun (not that the ‘old’ deals are unexciting: I certainly enjoy teaching the case study I wrote on Malcolm Glazer’s acquisition of Manchester United (I think the football (soccer) fans in the class enjoy it as well, even if they are Arsenal, Chelsea or even Bayern Munich supporters) or the very exciting takeover attempt by Sir Philip Green of Sir Stuart Rose’s Marks & Spencer). Note that two years ago when I went into a lecture or conference, I could hold up the Financial Times and say: ‘Look at today’s paper: there’s four major stories on the front page and each one is about a merger or acquisition.’ I don’t anticipate being able to do that for a while, but even one story on the front page is helpful and encouraging!
As icing on the cake, Federal Reserve Board chairman Ben Bernanke yesterday said ‘I think there is a good chance the recession will end later this year…’
It was also refreshing to see another ‘back to the future’ headline in the Financial News: ‘Morgan Stanley tops M&A league table with Shering-Plough Deal’ which went on to explain that Morgan Stanley had finished fifth in the global league tables last year but is now in first place year-to-date. Does this mark further return to normality in the markets?
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Intelligent Mergers 
Deal success: 2009 better than 2008
Posted on Friday, 11 September 2009. Filed under: Commentary, Mergers |
A study the Cass Business School conducted for Towers Perrin and reported widely (see, for example, Reuters’ report on 10 September 2009, ‘Deal Talk — Rallying stock markets help accelerate M&A plans’) showed that firms that do M&A deals are more likely to outperform their industry peers (and the market overall) than firms that have held back on doing acquisitions. This is consistent with an earlier study (released in June) that Towers Perrin sponsored and which focussed on the short-term market reaction to companies who were brave enough to do deals subsequent to the infamous Lehman bankruptcy weekend in September 2008. Both studies looked at all deals over $100 million done by public companies.
As reported in the above 10 September 2009 Reuters article: ‘Marco Boschetti, global head of M&A and restructuring at business consultancy firm Towers Perrin, said deals that closed in the second quarter of the year outperformed the market by 8.5 percent, compared to outperformance of 2 percent in the second quarter of 2008. “What this is saying is that there is a lot of value in deals at the moment and if you can afford to close a transaction you should go for it,” he said.’
This continues to confirm that the inflexion point in M&A activity may have been reached already, which I will write about shortly. Certainly if the word gets out that the market does reward firms that announce strategically defensible deals, even more deals should emerge from the planning stage to announcement and execution.
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