M&A springs back to life — and document reviews, we hope

The market for mergers and acquisitions sprang back to life yesterday when 10 deals totalling more than $27bn were announced, with over half of their total value paid in cash.  After months of deal inactivity, Oracle agreed to buy Sun Microsystems for $7.4bn; GlaxoSmithKline paid $3.6bn for Stiefel Laboratories ; and PepsiCo offered $6bn in cash and stock to buy out investors in its two biggest bottlers. Bankers said the deals signalled improving business confidence and market conditions for transactions, but cautioned that there was still a long way to go before the market could reach the levels of activity seen in the recent debt boom.

William Vereker, co-head of investment banking at Nomura, said: “Companies are taking advantage of an improvement in markets to execute on strategic transactions which have been in the pipeline. But confidence is still fragile and much will depend on how markets behave over the coming months before M&A volumes increase meaningfully.”

Others said it was encouraging to see deals being struck across several industry sectors. That contrasts with the first quarter, which was dominated by the pharmaceuticals industry – one of the few that is relatively stable and has strong cash flows. Pharmaceutical companies have also been forced to consolidate as they come under threat from patent expiries and generic rivals.

However, the value and volume of worldwide deals remain well below the levels seen during the recent M&A and debt boom. In the year to date, worldwide M&A is down a third from last year to $659.5bn. In the same period in 2007, global deals reached $1,424.3bn – the highest year-to-date total on record, according to Dealogic. 

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In analysis over the weekend in the Financial Times and several M&A blogs, the feeling was that patience would help grease the M&A wheels  Eight months ago, investment bankers were geared for a flood of asset disposals from distressed companies struggling to meet their short-term capital needs.  Banks beefed up their sell-side operations, bringing together M&A and restructuring specialists, to double the chances of winning mandates to sell businesses. The thinking was that rather than tap investors for cash, chief executives would try to raise capital by divesting anything non-core.  But so far, companies have favored rights issues and selling corporate bonds over the sale of even underperforming divisions.

This is mainly due to the vast gulf that still exists between buyers and sellers over how much an asset is worth. Both Royal Bank of Scotland and AIG pulled the sale of their insurance assets after balking at the prices bidders were offering.

But if the last downturn provides any clues, the disconnect between bidders and targets would start to narrow soon.  It was two years after the collapse of the dotcom boom in late 2000 before companies started selling assets to reduce debt accumulated from expensive acquisitions. Asset disposals accounted for half of all M&A activity in the U.S. and European technology, media and telecoms sector in 2003.

That level of activity was due largely to private equity groups’ willingness to buy big assets.  This time around, private equity has stayed on the sidelines as it writes down many investments acquired at the height of debt boom in 2006/07 and struggles to find the leverage to make acquisitions work.

But at some stage private equity groups will spend the cash they are sitting on and take the plunge.

And as we reported last week (click here), bankruptcy-related mergers and acquisitions have hit their highest level globally since August 2004 and are set to keep rising.   Data compiled by Thomson Reuters identified 34 such deals announced in March alone as more companies are forced into distressed sales.  In total, Thomson Reuters data showed that there have been 67 bankruptcy-related mergers and acquisitions announced thus far this year. Of those deals, the vast majority were in the U.S. or Japan.   “We’ve only just begun,” Gregory Milmoe, a restructuring partner at Skadden, Arps. 

So hopefully Monday is a harbinger of work to come.