Commentary

Unsurprising M&A Deal Volume: First Quarter 2008

Posted on Monday, 24 March 2008. Filed under: Commentary, Mergers |

M&A deal volumes are down significantly in the first quarter 2008.  This doesn’t come as a surprise to anyone, I am sure, so it should be put in perspective.

Of course, the final volumes for the quarter will not be available for another week, but with the Easter holidays underway, it isn’t likely the final figures will change dramatically. 

What will they look like?  According to preliminary figures widely reported from Mergermarket, the number of deals announced in the first quarter will be almost 30% down — not just when compared to the last quarter of 2007 but also when compared to the first quarter of 2007 (so…the year-over-year comparison).  And in historical terms, it’s the slowest since the first quarter of 2004.

This should be kept in perspective.  We’ve just been through — in 2006 and 2007 — the biggest M&A years in history.  The drop to Q1 2004 levels, still puts us at a deal volume figure that would have been hailed as ‘huge volume’ 10 years ago.  M&A volumes were increasing in 2004 and thus this volume four years ago was part of an upswing, while this current quarter is now part of a downturn.  So perceptions are different.  Very different.

And given the current turmoil in the markets, volumes will likely continue to come down as uncertainty certainly is not good for M&A, especially with the inability to fund deals with as much debt as previously.  Naturally, there are always some bottom-fishers, and they will love the current market — although I suspect many of those will wait for even further declines before acting.

Interestingly, advisory firms are still hiring M&A bankers.  Good deals will still need to be done.  Volume levels similar to 2004 still make a VERY good market.

Bear Stearns, Northern Rock and Société Générale

Posted on Monday, 17 March 2008. Filed under: Commentary, Mergers |

The big news is that Bear Stearns has been purchased.  Put out of its misery.  JP Morgan and the Federal Reserve have ridden to the rescue — some would say at the 11th hour — to make sure that the malaise surrounding Bear Stearns can be contained.  There’s lots of questions about whether Bear Stearns, the worst-hit firm on the Street from the credit and liquidity crisis, will be the only casualty or just the first.  Stay tuned.   Just as with the US presidential primaries, nothing seems to work as anticipated.  For staying up-to-date on this story, see the excellent coverage in the Financial Times., and for breaking news, FT Alphaville.

The Federal Reserve appears to have played a very large role in the sale — and reportedly is guaranteeing up to $30 billion in Bear Stearn’s less liquid assets.  The firm itself is being purchased by JP Morgan for a mere $2 per share, demonstrating clearly that equity shareholders should bear the brunt of risk when a company does poorly — and isn’t that an understatement of performance!  Note that little more than a year ago, Bear Stearns’ share price was $169.  A loss in share price of almost 99%;  that beats the loss in market capitalisation that AOL Time Warner achieved (97%) when they merged.  In both cases, the business models were flawed.

So, what’s the link to Northern Rock and Société Générale?  Readers of this blog will already know my thoughts about both (see here about Northern Rock and here about SocGen).  Certainly both Northern Rock and SocGen had flawed business models as well, and competitors were not surprised when either one had their near-fatal problems (Northern Rock also in the credit crisis).  Neither Northern Rock (with it’s UK version of the Bear Stearns market crisis impact) and SocGen (with it’s rogue trader(s) and the firm’s reaction to that crisis) should be allowed to remain independent.  Regulators in both France and the UK should have quickly encouraged another bank to take over where management failed those two companies.  And equity shareholders should have shouldered the impact. 

Note as well that Bear Stearns’ advisor, Lazard, was apparently trying over the weekend to shop Bear Stearns to other banks as well, including Barclays, HSBC and the Royal Bank of Scotland (who recently purchased ABN AMRO).  I hope this is noted by the French government, who appear to be trying to protect Société Générale from a foreign buyer.  This wasn’t a concern in the US, I’m sure, and the reason that Bear Stearns ended up in the hands of another US bank was likely to be more an issue of speed and simplicity than anything else.

Microsoft’s Hostile Acquisition of Yahoo: Impact on the M&A Market

Posted on Saturday, 2 February 2008. Filed under: Commentary, Mergers |

What a difference a day makes.

Talking to most M&A bankers, you would think that although they are very busy, there wasn’t much to look forward to in 2008.  Then another deal comes along that captures the public’s attention.  Nothing like a story that includes names such as Bill Gates, Yahoo, Microsoft and the two M&A heavyweights, Morgan Stanley and Goldman Sachs.

At almost $45 billion, this technically may be the largest tech deal ever (see The New York Times DealBook which has an excellent discussion about why this is the largest exclusively technology M&A deal ever — surpassing the Lucent acquisition of Ascend in 1999 — but being smaller than the largest tech-media deal ever, the ill-famed Time Warner AOL deal in 2000 valued at over $112 billion).  But more important is the attention it will get.

What are the issues other than for the popular press that will jump on any story that keeps Bill Gates in the news?

First, the deal will go through.  The potential for this deal has been around for a while, as have rumours of such a deal (see another story from The New York Times DealBook covering the history of the deal’s rumours).  It first surfaced in May 2006, and at that time the deal rumour was quashed with the following quote from Yahoo:

“Microsoft taking over Yahoo — that conversation has never come up,” Yahoo’s then-CEO Terry Semel told New Yorker writer Ken Auletta. “[We discussed] search, and Microsoft co-owning some of our search. I will not sell a piece of search. It is like selling your right arm while keeping your left — it does not make any sense.”

There is certainly going to be anti-trust (US) and competition (EU) concerns, but this deal is not inherently anti-competitive and in fact creates greater competition against Google’s hegemony in a number of markets.  But just because of their size, it can be expected that a tie-up between Yahoo and Microsoft will draw attention from the authorities, which may delay the closing beyond the normally expected 6 months for such a deal.

Second, it breathes new life into the market.  The advisors — Morgan Stanley and Blackstone confirmed on the Microsoft side and Goldman Sachs reportedly on the Yahoo side — will certainly provide each with nice fees (perhaps on the order of $25 million each).  Given the turmoil in the market, this will pay some bonuses, but certainly doesn’t go very far in offsetting the recent write-down from the sub-prime crisis. 

Shareholders in Yahoo will certainly benefit.  Microsoft’s bear hug bid with a 62% premium was designed to make sure that other bidders won’t appear to challenge it’s offer.  The market seems to agree, with the shares closing yesterday under the offer price of $31 per share.  Microsoft clearly intended this as proven by CFO Chris Liddell comment quoted in the Wall Street Journal’s article entitled ‘Microsoft’s Offer looks like a Knock-Out Punch’: “Clearly we believe the offer is a very attractive one from a Yahoo! shareholder perspective. We struck it in a way that we think will make it attractive.” Naturally, Microsoft’s share price declined (in this case, 6%) as happens to most bidders, as the market does also know that most M&A deals fail and this one has a high potential to do so, too.

Which brings us to the post-merger period, assuming the deal does proceed.  There will be a lot of blood.  Despite comments from Microsoft about how many new engineers it needs and how valuable Yahoo’s personnel will be, all such deals include significant redundancies — often as high as 10-15% of the combined workforces.  Those in the back-office are particularly at risk, of course, but also those in the front office, too, should be looking at whether they are likely to be survivors of a merger — even those in the acquirer, Microsoft.

Regarding the integration, note the excellent interview from The Seattle Times with Kevin Johnson, president of Microsoft’s Platforms and Services Division.  Unsurprisingly, he does downplay the cultural differences (VERY large) and potential redundancies.  Yahoo has over 14,000 employees and Microsoft has approximately 80,000 employees.  That would imply almost 10,000 people being fired.  That would populate a reasonably-sized town!

Saul Hansell at The New York Times commented that it looks like trying to build a space ship out of spare parts (see ‘Microsoft is Building a Spaceship out of Spare Parts’).  But isn’t that what dreams are made of?

Should SocGen be acquired?

Posted on Tuesday, 29 January 2008. Filed under: Commentary, Mergers |

Should Société Générale be acquired?  Naturally, the answer to this will still require some answers from SocGen itself together with the French regulators, but in any other country than France, the answer would be a resounding ‘yes.’  Look no further than Bankers Trust in the US who had several lawsuits and a declining franchise due to the activity of just one or two departments in derivatives and bond trading;  the US Federal Reserve apparently told Bankers Trust in the late 1990’s that they needed to find a buyer, and ultimately Deutsche Bank came to their rescue.

Yet France is unique in trying to save what it considers French assets.  You need look no further than the previous attempts by foreign banks (even including German banks during the period when France and Germany in the 1990’s were very close) to buy French banks;  or the famed rejection of a foreign bidder for Danone (the yoghourt makers) on national security grounds. 

The most natural bidder from the French perspective would be BNP or Credit Agricole, but this would have concentration problems that even the French might not be able to overcome.  It is unlikely the French would allow a British or American buyer — although if one came in as an investor to shore up SocGen, then I am sure the French would welcome the cash.  (KKR is rumoured to be considering this, as are various sovereign wealth funds who have ridden to the rescue of the American banks that were hit by the recent credit and liquidity crisis.)

How about Grupo Santander, who have concentrated their banking empire in the Iberian Peninsula and Latin America but have done very well with their purchase of Abbey National in the UK in November 2004.  Abbey were damaged goods.  SocGen is as well.  But both had franchises — including loyal customer bases — that were significant assets.  Emilio Botín, the chairman of Santander, has not made as splashy an acquisition since then.  SocGen fits the bill.  And Santander appears to be relatively unscathed by the credit problems of other banks, so has the wherewithal to do the deal. 

There’s rumours of HSBC looking at SocGen as well.  They, too, would have the ability to do the deal if approved.

One final comment:  SocGen shareholders should be grateful for all of the rumours of takeover, as it is propping up their share price.  Otherwise, given the size of the losses and the distraction impact (both on employees — who must all have their CVs out to other firms — and clients — who would find it hard to recommend SocGen over competitors at this moment), the share price should have plummeted.

Acquire Merrill Lynch? Merge Merrill with another bank?

Posted on Wednesday, 2 January 2008. Filed under: Commentary, Mergers |

Even John Thain’s magic is taking time to work at Merrill Lynch, although we really do need to give him a bit more time than he’s had to have a real impact.  Nevertheless, he’s been busy breaking up Merrill Lynch, with the sale of its capital finance business to General Electric just before Christmas (see the story in the Deal Journal from The Wall Street Journal on 24 December) which improved Merrill’s capital position by $1.3 billion, the announcement last Monday of the sale of $6.2bn in shares to Singapore’s Temasek and asset manager Davis Selected Advisers, the sale announced today of it’s insurance units to Aegon NV for $1.25 billion (see FT Alphaville and reportedly for $50 million less than discussed in August), and now the reports  from Reuters and The Observer that it is talking with Chinese and Middle Eastern sovereign wealth funds about further capital injections.

I’d like to refer readers back to two earlier posts on this blog:  ‘No Merger:  Just Split up Merrill Lynch‘ from 29 October and ‘More about Breaking Up Merrill Lynch, Citi and Northern Rock‘ from 9 November.  It seems to us that further changes, as predicted in those two postings, are still necessary, as an additional $7.5 billion is being sought (see Here is the City from today).  It also remains attractive to maximise the value of the Merrill franchise by conducting further sales, as John Thain appears to be contemplating, to focus on the core business of brokerage and investment banking.  This does require ‘breaking up’ Merrill Lynch — which is being done in a somewhat orderly fashion, even if the prices achieved for the pieces are lower than would have been achieved earlier (note the sale to Aegon above).

A merger should still not be out of the question, although discussions about a merger with Wachovia were cited as one reason that Stan O’Neal was fired.  One thing is certain:  When John Thain discusses a merger, he’ll check with the Merrill Lynch board first!

M&A Deal Volume Analysis 2007: What a Year!

Posted on Wednesday, 26 December 2007. Filed under: Commentary, Mergers |

Everyone’s been jumping onto the bandwagen of reporting the deal volumes for 2007, even before the year’s done (granted that not many more deals will be announced before 31 December).  I recommend reporting from FT Alphaville, The New York Times Dealbook, and The Wall Street Journal’s Deal Journal.  Note that all of these reports were from 21 December, a full week before year-end.

It was a record year (depending on whether Thomson Financial or Dealogic’s figures are used, it was $4.4 trillion or $4.7 trillion, respectively).  But a year with very different figures in the first and second halves, although the second half was no where near as bad as some people predicted in August when the sub-prime crisis was in full swing and depositors were queuing outside Northern Rock while the Bank of England was bailing out the bank.

Some interesting statistics — and thoughts — from those articles and others:

• The volume of deals in 2007 was 21% higher than 2006 and (as reported by the Wall Street Journal), even higher than 2000’s inflation-adjusted figure of more than $4 trillion.
• The second half of the year was 27% lower than the first half globally, but in the US, the volume fell 46%.  As the US was the ‘leader’ in the housing bubble burst and the growing liquidity crisis (and for several months the rest of the world smugly thought they might not be affected), does this mean rest-of-world volumes will decline further, catching up to the US?
• Volume in Europe was higher than in the US for the first time in five years and only the second time ever:  $1.78 trillion vs $1.57 trillion (Thomson Financial’s figures).  This may be partially due to the lag in Europe being affected by the credit markets, and the volumes in Europe may now decline further to match the US.
• Private equity players represented a massive 41% of the US market through the first half of the year but only 15% of the second half.  As these firms drove much of this merger wave (since 2003), does their absence auger further declines?  I was at a breakfast just last month were one director of a venture capital fund said he didn’t expect to make any purchases in the next 12 months;  others at the breakfast were nodding their heads in agreement, too.  And his was a fund still flush with cash!  What has changed is the availability of ‘cheap’ debt financing.
• All these figures are announced deals, but note that BHP Billiton was given on 21 December a ‘put up or shut up’ deadline of 6 February to make a formal bid for Rio Tinto (see article here from the Financial Times).  The proposed bid of $137 billion is a contributor to the 2007 ANNOUNCED volumes that could never come to pass if a formal bid is not made.
• Goldman Sachs once again led in advising on deals, but Morgan Stanley (who were largest in Europe), JP Morgan and Citi all advised on deals worth more than $1 trillion.  Last year, only Goldman could claim that level.
• Deals are taking longer to complete, with the average time being 88 days in the first half of the year and now 91 days in the second half. 

Where will it go from here?  To no one’s surprise, the conventional wisdom is for 2007 levels to be a record level for some time.  But let’s not forget that the time between the peak of the last cycle and the start of this cycle was only three years — a record short time.  Notably, the troughs between cycles have been getting shorter, so it may not be long before we see such global volumes again.

Doughty Hansen Sells Moeller

Posted on Saturday, 22 December 2007. Filed under: Commentary, Mergers |

I can’t help but comment on this story that made news earlier this week (see FT Alphaville and the Financial Times), because of the company’s name and my surname being identical — and it’s not that common a name. 

(Full disclosure:  I am not aware of any family connections between me, my ancestors or the German company recently sold.)

What’s happened?  Doughty Hanson, the UK-based private equity group, sold its German-based electrical systems and components maker Möller Group for €1.6 billion to Eaton, the US-based industrial firm.  Doughty Hanson has only owned Moeller Group for two years, had bought it’s 75% stake in 2005 for €1.1 billion, of which only €192 million was equity.  They apparently earned a gross internal rate of return of 54% and trebled their investment. 

 Good deals are still to be had.

Investment Banking Mergers?

Posted on Wednesday, 21 November 2007. Filed under: Commentary, Mergers |

There’s been a lot of talk in the past few weeks about whether the so-called ‘credit crisis’ has weakened a number of investment banks so much that they are now likely targets.  Just look at Top Firms said to be Takeover Targets, for example from Here is the City.  That entry ponders the independent future of Morgan Stanley, Merrill Lynch, Lehman and Bear Stearns and quotes Bloomberg’s analyst Matthew Lynn.  Most likely acquirers, he says, are the large non-US banks such as HSBC, Santander, Deutsche and even China’s ICBC (Industrial & Commercial Bank of China) — all with market capitalisations well in excess of those four companies and with less exposure to the US credit problems that have plagued the US-based companies.

We think that such acquisitions are not likely — although acknowledging that Lehman and the Bear are always on everyone’s list of acquisitions for firms looking to gain exposure to that segment of the financial services industry.  (And in more normal times, those two firms always seem to have a small takeover premium built into their ‘normal’ share price.) 

Not that consolidation of the industry wouldn’t be intriguing at this point.  But rather than being acquired by a firm that would gain the upper hand because of recent events, why not consider a merger between some combination of those four firms.  Merrill Morgan Stanley or Morgan Stanley Merrill?  Stranger things have happened.  Would that both Johns (Thain and Mack) could be so creative.  At least it would allow the two companies to hide many of the sins of the recent past and would provide a formidable competitor.  It would also give the newly combined company the opportunity to divest divisions as well. 

Given the global nature of the business, it shouldn’t even be of too great concern to the competition authorities, although they are certain to protest.  By the way, the other possible names of such a combination (‘Morgan Merrill’ or ‘Merrill Morgan’) can’t be used, I understand, because of an agreement that goes back to the original break-up of John Pierpont (J.P.) Morgan’s empire in the early 1930’s that prohibits Morgan Stanley or any of its successors from using the ‘Morgan’ name without ‘Stanley’ to follow — a right reserved for the other major part of that former empire, JP Morgan. 

More about breaking up Merrill Lynch, Citi and Northern Rock

Posted on Friday, 9 November 2007. Filed under: Commentary, Mergers |

There’s been a major market shift.  Of course there’s still new deals being announced, as the current merger wave is most definitely NOT over.  Note the record-breaking BHP Billiton £67 billion bid on 8 November 2007 for Rio Tinto (see FT Alphaville‘s announcement of this deal), a deal that is likely to be front-page news for a while as the deal is likely to go hostile and it has significant competition / monopolies / anti-trust concerns.  We haven’t had a good fight on the front pages of the business news since RBS beat Barclays to the ABN AMRO prize.  And if there are any other doubters about the continued progress of the current merger wave, then note that the volume of deals in the ‘slow’ third quarter of this year for EMEA was just about the same as the average volume of deals in all of 2006 at just over $400 billion — the record year of this merger wave thus far;  and thanks to Credit Suisse for this analysis).  October was the third strongest month globally this year for announced deals, too.

But the most interesting development recently is the suggested  breakup of various banks that have gotten into trouble with the recent credit and liquidity crisis.

Readers of this blog will have noticed that we first suggested the possible break-up of Merrill Lynch (see No Merger: Just Split up Merrill Lynch).  There have been many suggestions to do the same with Citi (for just one typical example, see Here is the City yesterday with it’s article Rivals Lick Lips at Prospect that Big Firm is Broken Up).  Even stranger is the lack of logic as to the firms rumoured to be break-up candidates and those who could be the purchasers of big pieces of those targets:  Morgan Stanley just announced large losses on the order of $3.7 billion, but is suggested to be a buyer of the retail side of Citi (a prospect that this writer finds just too far out, as the management of Morgan Stanley is more likely to be comfortable with added capability in the institutional side of the business than the retail side that would bring back memories of the frustrations with the Dean Witter merger of the late 1990’s).

There’s also the farce known as Northern Rock.  Will it be purchased (and possibly by those outside the industry such as Richard Branson’s Virgin, although recently the focus has been on Asian purchasers)?  Will it survive independently?  (Many people think that the smart money seems to be on this option now.)  Or should it be broken up as well?  The problem here is that the natural domestic UK buyers for it’s assets would face competition concerns (unless the Richard Branson option really does have legs or there is someone else who thinks the UK mortgage market is an attractive long-term strategic business.)  My own thoughts would see Northern Rock broken up, after a restructuring firm (or hedge fund, private equity fund or other similar organisation) cleans it up.  We haven’t changed our opinion from what we’ve noted before on this blog back in mid-September  (What Price Northern Rock?) and also in an article we wrote for the BBC (Why would anyone buy Northern Rock?).  We understand that there are several firms poking around the bank and seriously considering such a purchase — but quietly, as they do not want to push the price up.  Stay tuned.