Commentary
M&A Deal Volume, 2008: It’s all relative…
Do you really want to know? Of course you do. Bad news is exciting. Too exciting.
The market for M&A deals dropped to their lowest levels since 2005 — to just under $2.9 trillion. A decline of 28% globally. See … it wasn’t that bad, was it. It’s all about relativity. If we’d just had three years of $3.0 trillion in deals in 2005, 2006 and 2007, then this wouldn’t really seem low. Everyone would still be talking about a robust market, because these levels are well above all but two years of the last merger wave (in 1999 and 2000). It is just that we’ve gotten used to increases in the number and size of deals.
What’s changed? Private equity-backed deals were driving the market over the past several years. They declined 72% in 2008. These are the deals that drove the pricing for many non-PE deals as well. Thus, although they represented only under $200 billion (only?), they did have a larger impact on the overall market.
Where else was it bad (remember, the relative term of ‘bad’)? Europe was down 34%, the US down 25% and the Asia Pacific region ‘only’ 17%. Europe was actually even worse, when you look at the deals actually done because four of the largest ten European transactions were state bailouts: Royal Bank of Scotland, Lloyds TSB / HBOS, Fortis and ING.
Read Full Post | Make a Comment ( 1 so far )M&A Deal Volumes: It’s not Armageddon, Part 2
At the half year point, I noted that although deal volumes were lower, the world had not ended for M&A deals in 2008 (see here). Reading the papers, one would have thought that no deals were being done — and certainly the hype of the market was gone, with the front pages of the Financial Times and the Wall Street Journal usually being taken up with stories other than large M&A deals.
Another interesting note in the news today, in Financial News online today: With the inclusion of the €9.8 billion Commerzbank acquisition of Dresdner, the volume of deals as of earlier this week hit the $2.5 trillion mark — which, if no other deals materialised for the next four months, would make it the seventh strongest M&A year ever. But that story in the Financial News said that this milestone was reached two months later this year than last year. That’s not a bad news story for M&A, as I read it as a good news story that the market remains so strong.
Of course, there are bright spots and dark corners of the current market. Despite the Commerzbank / Dresdner deal, the financial services industry has seen the greatest fall in deal volume (42%). Mining and consumer products are the only two industries that are so far showing more deals this year.
Also of note: strategic deals are down only 16%, and the disappearance of many venture capital, private equity and hedge funds from the market has caused the financial deals to fall 63%. Overall, the M&A deal market is 27% lower.
If we annualise the current volume, we’ll see the 2008 market at $3.75 billion, which will make it either the third or fourth best year ever. Not Armageddon.
Read Full Post | Make a Comment ( 1 so far )It’s not Armageddon: M&A Deal Volumes in the First Half 2008
Reading the papers and listening to the news, you would think the bottom’s dropped out of the M&A market in the first half of 2008. Just last week, the headline in the Financial Times on 27 June 2008 was ‘Value of M&A falls sharply as buy-out boom ends’.
A closer read of the stories yields another answer. Granted, the value of M&A deals in the first half is down nearly a third compared to the first half of last year: $1.86 trillion, according to Dealogic. But if you annualise this figure, you will find that the volume of over $3.7 trillion would make 2008 the third or fourth largest year ever — and larger than 2006 that many people at the time thought would be the peak of the current merger wave.
There are some significant changes, although some things (such as Goldman Sachs topping the list of advisors) never seem to change. Deutsche Bank and Morgan Stanley appear to have fared most poorly. And overall, at least in Europe, investment banking fees are down commensurate with the market (35% in the first half, according to the Wall Street Journal). Private equity / venture capital deals are 78% lower and represent just 6% of the global M&A market, according to the FT. Their deals, of course, drove the market up in this last most recent merger wave in the mid-2000’s. Asia is holding up the volumes in 2008, by-the-way.
What will the second half bring? We do need to see some continuing announcements of blockbuster deals, but if there are a few (and I understand there are some in the works), then 2008 won’t look as bad as predicted by the Cassandras of the press and other industry pundits. I do hope I’m right and they’re wrong!
Read Full Post | Make a Comment ( 4 so far )What’s brewing? Stella Artois and Budweiser, The InBev offer for Anheuser-Busch
Rumoured for months, it finally happens. InBev makes a $46.3 billion offer for Anheuser-Busch. The largest deal this year so far if it goes through.
Just last week, reports came of Anheuser-Busch hiring Goldman Sachs and Citigroup on the defense and InBev raising a war chest of cash of $50 billion from JP Morgan, Santander and others (now revealed to include Barclays, BNP Paribas, Deutsche Bank, Fortis, ING and RBS). By-the-way, just as an aside, did you note in that list of banks providing the funding that it included all of the winning bidders for ABN AMRO (RBS, Santander and Fortis) but also including the ‘losing’ bank, Barclays?
In addition to Goldman Sachs, Citigroup is advising Anheuser-Busch, whilst Lazard and JP Morgan are advising InBev.
The story has been covered well in all the financial press (although we particularly like this reporting on Reuters). Key points: Mostly cash (and thus the share price of InBev has increased over 6% on the day of the offer, bucking the trend of share prices declining for bidders). Intention is to consumate a friendly deal, and thus was made at an 11% premium to the prior day’s close. Lack of potential alternative bidders (as SAB Miller, the current largest brewer globally, would have monopoly concerns if it made such a bid), and thus unlikely that InBev will have to sweeten it’s offer too much. Non-core assets in Anheuser-Busch (such as the entertainment park in Florida, Busch Gardens) that InBev could divest to help pay for the deal and to focus on the core brewing business.
Some other key points:
This industry is already in a period of consolidation, where SAB Miller and Molson Coors are now in a joint venture.
Why a cash offer? It’s unlikely that the Anheuser-Busch shareholders would want to have InBev shares listed on the Brussels Stock Exchange. (Similar in many ways to Deutsche Bank’s acquisition of Bankers Trust, at the time the largest purchase at $10.1 billion of a US bank by a foreign bank, but at the time Deutsche didn’t have it’s shares also listed on the NYSE; I wonder how long it will take for InBev to dual list, assuming it doesn’t mind the Sarbanes-Oxley and other US regulatory requirements.)
Depending on the final price offered, it might be the largest all-cash offer ever (now that the Microsoft-Yahoo deal appears to be dead and buried).
It’s nice to see another deal of this size. Industry consolidation by strategic buyers is currentl
Read Full Post | Make a Comment ( None so far )What happens when an M&A deal leaks?
In research sponsored and released today by IntraLinks and conducted at Cass Business School, we have analysed what happens to deals when they leak to the public prematurely. The answer is unsurprising and not good for those who want the deal to complete in a timely fashion.
Our analysis of over 350,000 deals since 1994 showed the following:
- Deal Completion: less than half of all leaked deals complete, compared to 72% of all non-leaked deals.
- Friendliness: only 80% of leaked deals are friendly, compared to 97% of all non-leaked deals
- Delays to Closing: leaked deals take alomost 70% longer to complete than non-leaked deals (105 days on average vs 62 days).
- Premiums: in a counter-intuitive finding, the premium paid in leaked deals is slightly less at 24% vs 28% on average for all deals.
Certainly, market leaks and insider trading receive considerable press attention but this is the first study to identify the impact of a pre-announcement leak to the press. As noted in the IntraLinks press release on this study, companies would be wise to heed the factors identified in this research so that they are fully aware of the historical impact of such leaks on deal activity.
The press release can also be seen here and as a news story it has been covered in the Financial Times Alphaville (you’ll need to scroll down a ways to find the reference in FT Alphaville), Yahoo Finance, Financial News, CFO.com and other publications on-line.
As always, I’m interested in your comments on whether you find these findings to be consistent with what you’ve observed, and especially the counter-intuitive finding that leaked deals have lower premiums.
Read Full Post | Make a Comment ( 1 so far )Investment Banking Acquisitions and Consolidation
When companies are down and out, they become acquisition candidates, of course. Who better at this time than investment banks? The share prices of all investment banks – even those who were less impacted by the credit crisis – are much lower than last summer, and continue to be very volatile.
Does this make them attractive acquisition candidates? It shouldn’t – at least to firms from outside the industry. (And if a non-banking company did consider entering investment banking now, wouldn’t you just wish you could listen when the independent non-executive directors asked ‘why would we want to enter investment banking NOW and what how will our shareholders respond?’)
But how about industry consolidation? Banks buying investment banks. Investment banks buying each other or merging.
Barclays missed out on ABN AMRO (and aren’t they happy about that!). Deutsche Bank still isn’t enough of a bulge bracket firm to its liking – despite a strategy to achieve that status since it’s acquisition of Morgan Grenfell in 1989 almost 20 years ago and it’s acquisition of Bankers Trust / Alex Brown 10 years later.
So I’m not talking here about companies buying INTO investment banking, but rather investment banks (or universal banks) buying other investment banks. Stay tuned, but it may be starting.
See the reports first in Bloomberg on a possible Allianz (Dresdner Bank) / Commerzbank / Postbank merger. Note the stories, first reported by The Daily Telegraph, that Bob Diamond at Barclays was interested in buying the investment banking parts of UBS or perhaps Lehman.
The big question I think is whether the large banks in China and India will want to get into this business. They have been quietly building their domestic capabilities, but having been largely unaffected by the credit and liquidity market issues of the past ten or twelve months, they have a relatively greater ability to make a purchase than many American and European financial services firms. Not sovereign wealth funds, but real banks.
Any comments welcome. Who actually would be willing to buy into this industry? Or who could be a consolidator? Are Chinese banks ready yet for all the ‘fun’ of being global investment banks (with apologies to Ken Lewis of Bank of America who said last year that he’d had just about enough fun in investment banking, thank you)?
Read Full Post | Make a Comment ( 3 so far )M&A Advisors Moving to Asia — Is it officially a trend?
Two days ago, the BBC called me to talk about the move to Asia of senior investment bankers, as there had been a flurry of reports in the past several months about managing directors (Credit Suisse, Citi, Deutsche Bank, Morgan Stanley) moving to Hong Kong and other places in Asia from their current perches in New York or London. You can see the BBC News article here, but it was also widely picked up in the past couple days by other media, ranging from Money Morning in the US to Finance Markets in the UK.
Investment bankers follow the money. I can relate to this as while at Morgan Stanley in the 1980’s and 1990’s, I personally was transferred by the company first to Japan as that country was flexing it’s financial muscles in the mid-1980’s and then to Germany following the fall of the Berlin Wall and the reunification of the country.
With sovereign wealth funds (many being based in Asia) having a lot of money, with Asia having escaped the worst of the credit crunch and with the crunch having hit the US and Europe the hardest, it is not surprising at all to see this trend of executives – and indeed corporate centres of excellence – to Asia. Once you get critical mass in a location, it begins to snowball and that is what is happening there.
This doesn’t mean that London and New York will lose their crowns as respectively the #1 and #2 global financial capitals, but it may mean that their combined market share is lower. It does, however, mean that the second tier financial centres – for example, Frankfurt, Chicago, Paris – will be most affected.
Do you think this is a long-term trend? I think it applies to M&A (the focus of this blog) as much as any other area of investment banking, but we’re short of evidence at this point except anecdotally.
Read Full Post | Make a Comment ( None so far )M&A Deal Success in 2008
Now is the time to do deals. Conventional wisdom may say that with the volume of M&A deals declining, a company should pause in its acquisition programmes. No. Please don’t so so.
Earlier today, Towers Perrin published a research report on the historical success of deals in the year after the M&A market has peaked. Towers Perrin sponsored this research conducted by one of my researchers, Kate Chalova, and me at Cass Business School. See coverage of this in eFinancial News, Wall Street Journal Market Watch, Dow Jones, The New York Times Deal Book, and Management Today amongst others and as covered as well today on the TV by CNBC.
We’re assuming, of course, that 2007 will have been the peak of this most recent (can we still call it current?) merger wave. That makes 2008 the post-peak year. Thus, 2008 corresponds best to 2000 (the year following that merger wave’s peak in 1999) and 1990 (following the 1989 peak). When we looked at data in those two prior merger waves, we found incontrovertible evidence that the returns in the post-peak year exceeded those of the peak year and the years leading up to the peak. Here’s our chart:
Deal Share Price Performance (Over / Underperformance vs Global MSCI Index)
In this climate, more than ever, deals will be scrutinised to see if they deliver value. Our previous findings have shown that the current merger wave has consistently reversed the historical trend and has been good for value creation. In previous waves, on average, value had been destroyed. But even then, the post-peak years have shown that sense came to play as the market cooled and value was created by companies not caught up in the froth of the market. So our analysis should provide positive grounds for confidence for corporations who have the ability to do deals today and for their shareholders. Based on our analysis, there is significant potential upside to doing a deal in 2008, a post-peak year, even though it may be even more necessary than ever to select deals carefully.
As I said in the press release about the study, in this climate, more than ever, deals will be scrutinized to see if they deliver value. This analysis should provide some confidence for both corporations that have the ability to do deals today and for their shareholders. Based on our analysis, there is significant potential upside to doing a deal in 2008, a post-peak year, even though it may be even more necessary than ever to select deals carefully
Why is this so? Obviously, one reason is that there’s less hype in the market and that the cost of buying a company may be lower. But there are other reasons as well. Fewer auctions. Better focus on deal selection because the market is going down and it may be less obvious why deals should be done (and thus deals are more difficult to justify to sceptical boards). The declining market itself may be a discipline that keeps companies from doing poor deals. In another report issued a few days after ours, Boston Consulting Group came to the same conclusion using some of the same information.
The full press release can be see on the Towers Perrin website here, which also provides a link to the full report.
Read Full Post | Make a Comment ( None so far )Mars to acquire Wrigley: Strategic M&A deals definitely not dead
Mars, with a little help from Warren Buffet, aims to acquire Wrigley (see FT Alphaville, which also refers to another Financial Times article discussing consolidation in the chocolate and candy industry).
This is a sweet deal (pun intended). It shows once again that strategic deals will be the flavour (again, pun intended) of the M&A market this year. Microsoft bidding for Yahoo. Deutsche Bank targeting (again!) Postbank. Mars and Wrigley. Not only do these make strategic sense for the bidders and targets, these are large deals, too, thus demonstrating that megadeals aren’t past their sell-by date (again, pun…) in 2008. Yes, the market is slower than last year, but these strategic deals make more long-term sense than the typical ‘financial’ deal done by the Private Equity and Venture Capital houses that drove valuations and deal volumes for the past four years. Note as well that all these deals could be self-financed as well (although Mars is getting some help from the master of long-term investing, Warren Buffet).
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Intelligent Mergers 
Impact of Sovereign Wealth Funds
Posted on Monday, 2 March 2009. Filed under: Commentary, Mergers |
There’s an excellent piece of research recently published on the impact of sovereign wealth funds on the companies (mainly in the West) in which they invest their money. See a summary in the Financial Times HERE. As an academic study, you can see the full report HERE.
Much of the report has to do with operational and finanical (including market) performance of companies in which the sovereign wealth funds have invested. The report shows that target company performance improves after a fund has made its investment. There are also significant corporate governance issues that are contrary to the conventional wisdom (especially the statements of many Western politicians): apparently, the average investment of a sovereign wealth fund is 0.74% share ownership — clearly not a controlling interest! — with an investment of just over $46 million. These are not what the popular press would have you believe.
Why is this of interest in M&A, as most of the investments are clearly not therefore for control of the companies in which they invest? (And the study shows that in less than 0.5% of their investments are the sovereign wealth funds taking a 50% ownership position or greater.) The interest lies in what impact these funds have on deals and where there is potential for an ultimate acquisition.
Anecdotally, it appears that M&A deals in certain areas with sovereign wealth funds behind them have caused problems: the proposed purchase by DP World (controlled by the Dubai government) of P&O’s US business or when the Kuwait Investment Office in 1987 purchased 20% of British Petroleum (but was later forced to sell half it’s stake). The Chinese oil company, CNOOC, ran into problems as well in 2005 when it tried to purchase the American oil company UNOCAL.
This study can therefore go a long way towards showing the supporting role that these funds can play — even if recognising that power could be exerted if they wished, albeit not in most cases through direct control because of a majority position. Thus the above three examples should have been allowed, if you believe this study which is expertly documented.
Anything at this time to support the re-emergence of the M&A market is welcomed. Just as basic funding and liquidity enables most companies to continue operating effectively (and the lack of liquidity being a major issue for many companies now), an effective M&A market is necessary for the health of the economy too, as it enables the strong to become stronger (up to the point where anti-monopoly issues would arise) and the weak to be taken over by the strong, and thus strengthened overall. M&A done properly does result in 2 + 2 = 5. These days, that can’t be bad.
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