M&A Rebound Years Away as Morgan Stanley Sees ‘Gentle Recovery’

Dec. 30 (Bloomberg) -- Takeover advisers who cheered a surprise fourth-quarter surge in mergers and acquisitions may still have years to wait for a return to 2007’s record dealmaking.

Takeovers by Exxon Mobil Corp. and Warren Buffett’s Berkshire Hathaway Inc. helped push up the value of M&A transactions 52 percent to $530 billion in the quarter, the fastest pace in more than a year, according to data compiled by Bloomberg. Even with the increase, firms such as Morgan Stanley and Sanford C. Bernstein & Co. are predicting 2010 won’t be especially busy for merger specialists.

“If you look at previous M&A cycles, the first year after the trough is always one of gentle recovery before things pick up,” said Dieter Turowski, Morgan Stanley’s head of European M&A, who predicts deals will rise 10 percent to 30 percent. “It’s going to take us a couple of years to get back up to peak volumes.” His New York-based firm is 2009’s biggest merger adviser, according to Bloomberg data.

Mergers are recovering as the U.S. economy picks up speed, with the Standard & Poor’s 500 advancing 25 percent in 2009. Economists surveyed by Bloomberg estimate annualized fourth- quarter growth rose to 3 percent from 2.2 percent in the preceding period. More deals mean more fees for Wall Street, which probably earned $17.5 billion for merger advice this year, the least since 2005, according to Bernstein’s Bradley Hintz.

Hintz predicts M&A deals will jump 35 percent next year, measured in total dollars. That’s not enough to beat 2008 and Hintz said he expects M&A won’t reach 2007 levels for at least four more years.

Advisory Rankings

Morgan Stanley was the biggest merger adviser this year, according to data compiled by Bloomberg, the first time since 2000 it unseated Goldman Sachs Group Inc. Morgan Stanley worked on at least 268 takeovers worth about $531 billion combined, compared with 254 deals by New York-based Goldman Sachs valued at $478 billion.

Skadden Arps Slate Meagher & Flom LLP was the biggest legal adviser to principals in transactions. Skadden is working on at least 141 deals worth $212 billion, Bloomberg data show.

The publicly traded firms whose results are most influenced by M&A cycles include investment banks Lazard Ltd., Evercore Partners Inc., and Greenhill & Co., because advising on takeovers is their biggest business, Goldman Sachs analysts said in an October research note. They recommended buying Lazard to bet on a rebound.

Building Confidence

Mergers and acquisitions dropped about 37 percent this year to $1.75 trillion, according to data compiled by Bloomberg, less than half of 2007’s record $4.04 trillion. If the fourth quarter sets the pace for next year, mergers will rise 21 percent.

The Conference Board’s index of CEO Confidence advanced to 63 in the third quarter, the third straight quarterly increase among U.S. business leaders after a record low of 24 a year earlier. U.S. gross domestic product will expand 2.6 percent next year after dropping 2.5 percent in 2009, according to the median estimate of economists surveyed by Bloomberg.

Some companies may rush to do debt-financed deals to take advantage of historically low borrowing costs that might not last, said John Studzinski, head of Blackstone Group LP’s advisory business.

The three-month London interbank offered rate, the amount banks charge to lend to one another, declined to 0.25 percent as of yesterday from 4.82 percent on Oct. 10, 2008, when the spread between the lending benchmark and the Federal Reserve’s target rate reached a record in the aftermath of Lehman Brothers Holdings Inc.’s collapse.

Studzinski predicted M&A will increase about 20 percent in the U.S. next year and remain unchanged in Europe and Asia.

Exxon, Buffett

In the fourth quarter’s biggest deal, Exxon Mobil made its first acquisition of more than $2 billion in a decade. The biggest U.S. oil company agreed to pay about $30 billion in stock for XTO Energy Inc. to get access to natural gas production in shale formations.

“Industrial logic is trumping fear,” said Robert Spatt, a partner at Simpson Thacher & Bartlett LLP and an adviser to private-equity firms including KKR & Co. and investment banks such as JPMorgan Chase & Co. “If you’d told me six months ago that we’d see these big strategic deals, I don’t think anyone would have predicted it.”

Buffett arranged the biggest takeover of his career when his Berkshire Hathaway agreed to buy railroad Burlington Northern Santa Fe Corp. He’s paying $26 billion for the 77 percent of the company he doesn’t already own, while assuming $10 billion of debt.

Target Values

The median multiple to earnings paid for U.S. public companies that were taken over rose 43 percent to 24.6 in the second half of 2009 from 17.2 in the first half, according to data compiled by Bloomberg. The median over the previous four years was 25.5.

Leveraged buyouts also exceeded some expectations in the quarter. Health market data provider IMS Health Inc.’s LBO, valued at $5 billion including debt, was the biggest public- company takeover by a private equity firm since 2007.

“I don’t think anybody would have said at the beginning of the year we’d be doing $5 billion public-to-privates,” said Jeffrey Kaplan, head of M&A at Bank of America Corp. and a veteran adviser to buyout firms. Private equity has about $400 billion of committed capital waiting to be put to work since dealmaking ground close to a halt in 2007, according to PitchBook Data Inc. in Seattle.

Exit Strategy

Buyout firms are counting on M&A and initial public offerings to exit some of the $2 trillion in leveraged buyouts made since the start of 2004. Distributions to clients fell by two-thirds to $63 billion in 2008 from the previous year, according to London-based researcher Preqin Ltd. In November, Blackstone sold its stake in European drink maker Orangina Schweppes to Japan’s Suntory Holdings.

Christopher Lawrence, co-head of investment banking for North America at N.M. Rothschild & Sons Ltd., said he’s noticed a “very substantial pick-up of cross-border M&A dialogue.”

Kraft Foods Inc. and Vivendi SA are among those reaching into faster-growing markets such as Brazil. Kraft, based in Northfield, Illinois, is mounting a $16 billion hostile takeover bid for Uxbridge, England-based Cadbury Plc to get sales in emerging markets, and Paris-based Vivendi sold a stake in General Electric Co.’s NBC Universal to focus on acquisitions in Latin America and Africa.

“There’ll be some hesitations and hiccups in growth and market levels,” said Peter Weinberg, co-founder of Perella Weinberg Partners LP, the New York-based investment bank. “You may even see a lessening of confidence in the marketplace as the year progresses.”

To contact the reporter on this story: Zachary R. Mider in New York at zmider1@bloomberg.net

To contact the editors responsible for this story: Alec McCabe at amccabe@bloomberg.net; Rick Green rgreen18@bloomberg.net.