Was it really only two months ago that we were seeing headlines like this:“M&A activity slack in spite of renewed appetite“, and reading columns like this, by the FT’s M&A reporter Lina Saigol, (our emphasis):
Dealmakers are born optimists, but even by their own standards there has been little to be cheerful about so far in 2010….
… Global merger and acquisition volumes have fallen to the lowest level in six years, reaching $1,180bn in the first six months – an increase of just 3 per cent on the same period last year, according to data from Dealogic.
Now, we’re seeing articles such as this, from Thomson-Reuters’ M&A scorecard last week:
Historically, August is a slower month for M&A activity and this week’s total is the largest week in August in four years since total M&A volume reached $97 billion during the week of August 20, 2006. Just past the halfway point of the month, total volume has reached $197.6 billion this month and could break records for August activity with the largest August on record in 1999 when total activity reached $274.8 billion.
Indeed, as the Wall Street Journal noted in a report headed “Deals stage a comeback” (our links and emphasis):
Global merger activity is sweeping to its highest levels since late 2009, presenting a glimmer of economic confidence while the bond and stock markets continue to price in a weakening U.S. economy.
On a day of bleak jobless news and a 144-point drop in the Dow Jones Industrial Average, Intel Corp surprised investors by unveiling plans for a $7.7 billion all-cash takeover of internet security company McAfee Inc. That came just hours before First Niagara Financial Group Inc. in Buffalo announced the biggest bank merger since the peak of the 2008 financial crisis, a $1.5 billion acquisition of NewAlliance Bancshares Inc.
Both deals pale in size next to BHP Billiton’s hostile $39 billion offer for Potash Corp. of Saskatchewan, disclosed Tuesday.
Beyond the latest swag of mega-deals is a contest that is worth less than $2bn but will surely rank as one of the year’s most fiercely fought: the escalating battle between Hewlett-Packard and Dell for data storage company 3Par.
And beyond the US, rising deal mania seems also to have gripped Asia. As DealJournal reported recently (our links and emphasis):
In the past few weeks, a Hong Kong infrastructure company owned by tycoon Li Ka-shing, a Thai tuna maker and a South Korean oil company all announced plans to buy assets outside Asia. That is on top of interregional transactions, with India’s Mahindra & Mahindra chosen as the preferred bidder for South Korea’s cash-strapped Ssangyong Motor, Japan’s Kirin Holdings buying a stake in the maker of Tiger beer, and a resurgence in acquisitions by Chinese and Indian companies, after the European debt crisis and weak valuations put a damper on activity.
Among other deals – agreed or in the process – involving Asian bidders or targets are the $8.5-$9.6bn move by Vedanta, India’s biggest miner, for a majority stake in Cairn India, subsidiary of UK oil explorer Cairn Energy; the $6bn deal by Reynolds, subsidiary of New Zealand-based Rank group, for US waste-bag maker Pactiv and the scramble among international buy-out firms and Taiwanese companies for Taiwanese cable TV operater China Network.
This week’s moves include one by Korea’s National Pension Service to take a $850m stake in a US pipeline; and Thursday’s news that Japan’s Asahi Breweries will buy Australia’s P&N Beverages for $322m.
That’s not to mention one of the biggest deals of the year, Bharti Airtel’s $10.7bn acquisition of most of the African telecoms assets of Kuwait’s Zain.
The list goes on… But before we choke on our own deal-listing frenzy, we revert to Dealogic for some context.
The data provider calculated for FT Alphaville that the total amount of outbound cross-border deals by acquirers in the Asia-Pacific region (including Japan) so far this year amounts to $186.2bn, excluding debt ($200bn including debt).
That’s about two-and-a-half times the $70bn (ex-debt) of regional M&A deals for the same period in 2009, and already way ahead of the full-year total of $127bn.
In fact, 2010 could be on track to top the total amount of Asia-Pacific deals in 2008, when cross-border M&A involving Asian buyers hit a record $211bn.
And you can certainly expect more activity from Asia, where currencies – led by the yen and including the Thai baht, Korean won and Indonesian rupiah – are strengthening against key western currencies and economic growth is increasingly robust.
As if all that were not enough, a look at some business sectors is also instructive. Bloomberg reports on Friday that M&A activity in the insurance industry is headed for the biggest year since the peak of the last merger boom as financial-services firms from Bank of America to Aegon of the Netherlands off-load assets.
But before you assume that boom times are rolling and the barbarians are back in force, think again, says James Stewart at SmartMoney. In a well-timed swipe at what he calls the “myth of M&A“, he challenges perceptions that M&A booms portend bull markets.
Rather, he argues, deal volume is actually more indicative of market tops than bottoms, noting:
A look at the numbers suggest that deal volume is, if anything, a reverse indicator of market direction. Consider that the all-time record for merger deals in a single year – $4.3 trillion, according to data-tracking firm Dealogic — came in 2007. That’s the same year the Dow Jones Industrial Average hit its all-time high. The feverish pace continued in 2008, until deal volume fell off a cliff after the collapse of Lehman Brothers and stock prices plunged. November 2008 marked the lowest level of M&A activity since 1995, when Dealogic started tracking deal volume.
Whether topping out or climbing ever-upwards, the Journal points out that not all deals are succeeding – and that some of the potentially biggest deals have failed miserably:
Prudential PLC’s $35.5 billion bid for AIG’s Asian unit [AIA] fell apart, in part because of shareholder opposition to the price tag and the giant rights issue to finance it. And even where banks are particularly keen to find alternatives to low-yielding bonds, companies and private-equity bidders can still find sufficient funding hard to get.
Lex, too, considers the downside of M&A booms, warning:
Investors should worry whenever bosses and bankers succumb to deal-fever, since so many corporate transactions end up destroying value. The latest crop has some of the tell-tale signs of danger: high ego, high price and over-confidence.
But we’ll leave the saga of M&A failures and the pitfalls of deal-making frenzies for another post…