M&A Snaps Back as BHP, Intel Drive Busiest Quarter in 2 Years

Dealmaking staged a comeback in the third quarter, with a jump in multibillion-dollar takeovers putting this year on pace to surpass 2009.

The quarter was the busiest in two years, with $562.6 billion of announced transactions, according to data compiled by Bloomberg. BHP Billiton Ltd. made an unsolicited $40 billion offer for Potash Corp. of Saskatchewan Inc., Sanofi-Aventis SA began its pursuit of Genzyme Corp. for at least $18.5 billion, and Intel Corp. announced its largest acquisition, the $7.7 billion takeover of security-software maker McAfee Inc.

“M&A activity in the third quarter was strong, even better than expected,” said Jeffrey Kaplan, global head of mergers and acquisitions at Bank of America Corp., which is advising Potash Corp. on its takeover defense. “I see real potential for a broad-based recovery with a lot of larger corporate deals.”

With almost $3 trillion of cash in their coffers, companies drove a 59 percent increase in takeovers from a year ago, Bloomberg data show. Record-low borrowing costs encouraged dealmaking as the Standard & Poor’s 500 Index headed for its best September since 1939. The number of transactions valued at more than $3 billion doubled in the quarter, the data show.

The jump in deals in the third quarter, typically the slowest three-month period of the year, brings total announced takeovers to $1.48 trillion in the first nine months of 2010, compared with $1.76 trillion in all of 2009. This quarter accounted for about 38 percent of the volume so far this year.

‘Flush With Cash’

“We are at the start of an up-cycle,” said Henrik Aslaksen, Deutsche Bank AG’s global head of M&A in London. “Companies are flush with cash and have decided that it might be a good time to pick up quality assets they may have been eyeing for a while.”

Oracle Corp. Chief Executive Officer Larry Ellison said on Sept. 23 the company is seeking to buy chipmakers and extend its push into computer hardware. Procter & Gamble Co. CEO Bob McDonald said earlier this month his company is on the lookout for brands with international appeal.

The 1,000 biggest companies by market value worldwide have amassed about $2.87 trillion in cash and equivalents based on their latest filings, according to data compiled by Bloomberg. The figure excludes financial-services firms. Nestle SA, Europe’s largest company by market value, got $28.1 billion from an asset sale last month, sparking investor speculation it may step up takeovers.

Record-Low Rates

“Major corporations have the ability to implement deals and long-term strategies now, given their large cash buildup and the availability of low-cost financing,” said Paul Parker, head of global M&A at Barclays Capital, the investment-banking unit of London-based Barclays Plc.

U.S. companies taking advantage of cheaper financing include Microsoft Corp., PepsiCo Inc. and Hewlett-Packard Co., which won a $2.35 billion takeover battle for 3Par Inc. in the third quarter and also agreed to buy ArcSight Inc., a maker of network-security software, for $1.5 billion.

Microsoft last week sold $1 billion of three-year notes at 0.875 percent, the lowest interest rate on record for that maturity, according to Barclays Capital data.

Buyouts also recovered in the quarter, with takeovers involving private-equity firms more than tripling from a year earlier to $58.3 billion. Burger King Holdings Inc. agreed to be acquired by 3G Capital for $3.3 billion in the biggest restaurant deal in at least a decade, while CVC Capital Partners Ltd. agreed to buy TDC A/S’s Swiss unit for 3.3 billion Swiss francs ($3.4 billion).

Tax Driver

Private-equity firms may do more deals in the remainder of the year as they race to sell assets ahead of possible tax changes in the U.S., according to Jeffrey Raich, managing director and co-founder of Moelis & Co. The rate on carried interest, or the share of profits that fund executives earn as part of their compensation, is slated to rise to 20 percent in 2011 from 15 percent currently.

“You are seeing a lot of seller deals based on concerns about increases in capital-gains tax rates and potential legislation around carried interest have driven private-equity firms to sell portfolio companies this year,” Raich said. New York-based Moelis advised Connecticut-based buyout firm Littlejohn & Co. on the $890 million sale of Van Houtte Inc. coffee to Green Mountain Coffee Roasters Inc. this month.

Blackstone Group LP, the world’s biggest private-equity firm, said Sept. 23 that a $10 billion buyout is possible as banks are more willing to lend.

Failed Deals

To be sure, volatile markets and the outlook for earnings in certain industries are making some deals hard to get done. At least one buyout failed to materialize when talks ended between disk-drive maker Seagate Technology Plc and private-equity firms TPG Capital and Silver Lake for a $7 billion deal, people with knowledge of the discussions said last week.

P&G dropped a plan to merge its Pringles unit with Diamond Foods Inc. in August, people with knowledge of the talks said this month. Confidence among U.S. consumers in September fell to the lowest level in seven months as Americans became more pessimistic about the labor market, according to Sept. 28 figures from the Conference Board.

“I’m the most positive I’ve been since the beginning of the year, but I don’t think we are about to experience a new M&A boom,” said Giuseppe Monarchi, head of Europe, Middle East and Africa M&A for Credit Suisse Group AG.

‘Significant Confidence’

Mergers and acquisitions will be the most robust in the financial-services, technology and natural resources industries, said Peter Weinberg, partner and co-founder of Perella Weinberg Partners in New York. He said improved confidence at the start of the year has been the impetus for activity now because of the typical six- to nine-month lag time to arrange a deal.

“People had significant confidence in the equity markets, the financing markets or their own strategic aspirations,” said Weinberg.

The S&P 500 Index rallied 80 percent from its bear market low in March 2009 through April 23 of this year, data compiled by Bloomberg show. The benchmark gauge for U.S. equities then retreated 16 percent through July 2 and has since rebounded 12 percent.

Goldman Sachs Group Inc. is the top takeover adviser this year with $325.9 billion of deals and was followed by Morgan Stanley, which has $301.6 billion, according to Bloomberg data. New York-based JPMorgan Chase & Co., which is advising BHP on its Potash Corp. bid, ranked third with $263.1 billion in deals. Credit Suisse and Bank of America ranked fourth and fifth, the data show.

“We are cautiously optimistic about next year,” said Hernan Cristerna, JPMorgan’s head of European M&A in London. “Conditions are in place for 2011 to be better than 2010 in terms of volumes.”

To contact the reporters on this story: Brett Foley in London at bfoley8@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net.

To contact the editors responsible for this story: Jeff St.Onge at jstonge@bloomberg.net; Jennifer Sondag at jsondag@bloomberg.net.

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