Dealmaking at Risk as Rout Threatens Best Year Since 2007
The plunge in global stocks is threatening to derail what was on course to be the best year for takeovers and initial public offerings since 2007.
The drop makes it more difficult to value takeover targets as well as IPO candidates, investment bankers said. About $2.5 trillion vanished from global equities yesterday after Standard & Poor’s cut the U.S. credit rating. The Dow Jones Industrial Average sank 634.76 points, extending a 9.8 percent drop in the previous two weeks. Hong Kong’s benchmark Hang Seng Index fell 5.7 percent today, the biggest decline since November 2008.
“It’s hard to price deals while there is this kind of turmoil going on,” Laurence Grafstein, co-head of mergers and acquisitions at Rothschild in New York, said in an interview yesterday. “You need to have some stability, a window to price things or to finance things. All this fluidity obviously puts deals on hold.”
Takeover targets from St. Louis-based Ralcorp Holdings Inc. to Australia’s Foster’s Group Ltd. (FGL) have sunk below the value of the offers as Standard & Poor’s cut the U.S.’s AAA credit rating for the first time and amid Europe’s worsening debt crisis.
Last week, Houston-based toolmaker Cooper Industries Plc abandoned a bid for Laird Plc, the maker of electronic shields for laptops, after failing to agree on price. Fidelity National Information Services Inc. followed suit, backing away from an offer for U.K.-based financial-software maker Misys Plc.
“If you are a buyer, you will become more cautious and probably slow down your internal process,” said Jeffrey Raich, managing director and co-founder at Moelis & Co. “If you are a seller, then you will reconsider whether now is the time to go to market.”
Obtaining financing also may grow difficult as borrowing costs rise. The extra yield investors demand to hold U.S. investment-grade corporate debt rather than Treasuries jumped 16 basis points to 190 basis points, the highest since last September, Bank of America Merrill Lynch index data show. Relative yields on junk bonds soared to the most in almost a year.
The equities rout has also hurt the IPO market, which was also headed for its best year since 2007. WageWorks Inc., Cathay Industrial Biotech Ltd. and InvenSense Inc. are among companies that have delayed or scrapped first-time share sales as volatile markets sapped demand for new stock. At least six IPOs have been postponed or canceled since the global slump started Aug. 3, according to data compiled by Bloomberg.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, has more than doubled since that date as bets by investors that stocks will fall have surged. The volatility measure closed at its highest since March 2009 yesterday.
“Inevitably when you have this level of uncertainty or volatility in the market, you’ll see some slowdown,” Marshall Sonenshine, chairman of New York-based investment bank Sonenshine Partners LLC, said in a Bloomberg Television interview yesterday. “One has to put that in the context of an M&A market that in the first half of this year has been rather robust.”
Global announced deal volume in the first six months of 2011 reached $1.27 trillion, a 34 percent jump from $945.2 billion in the same period a year earlier, according to data compiled by Bloomberg. If that pace continued in the second half, deal volume would top the $2.49 trillion reached in 2008. That would still trail 2007’s record $4 trillion in takeovers.
As of yesterday, about 1,100 IPOs globally had raised $141.6 billion this year, more than during the comparable period in any year since 2007, data compiled by Bloomberg show.
The U.S. calendar for IPOs, which started this week with 12 deals scheduled to price, is already thinning out, a sign investors are retrenching against losses and showing less appetite for the added risk of a newly public company, said Renaissance Capital LLC’s Nick Einhorn.
“When things are going well, that’s when investors are looking at IPOs,” said Einhorn, an analyst at the Greenwich, Connecticut-based IPO investment firm. “When the market’s as volatile as it is with many big issues at stake, investors are going to be focused on those instead.”
Beijing-based China Everbright Bank Co. delayed a share sale in Hong Kong for the second time in less than two months because of stock-market swings, two people with knowledge of the matter said Aug. 5. Williams Cos. said today it may cancel the initial public offering of its oil and natural-gas exploration unit and spin it off instead, depending on market conditions.
The market turmoil hasn’t stopped some acquirers. This month, Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) made a $3.25 billion unsolicited offer for Transatlantic Holdings Inc., seeking to break up a deal the target company had reached with another insurer. Transatlantic is asking Berkshire to improve the offer, according to a statement yesterday.
Blackstone Group LP (BX), the world’s biggest private-equity firm, agreed last week to buy Emdeon Inc., a health-care billing company, for about $3 billion. The company plans to back the buyout with about $2 billion in debt.
Some conditions are still ripe for deals. The top 1,000 non-financial companies worldwide are sitting on about $3.3 trillion in cash and equivalents stockpiled in the recession, Bloomberg data show. Companies such as Coal India Ltd. said this week that they are looking for deals. Last week Smith & Nephew Plc, Europe’s biggest maker of artificial hips and knees, said it’s seeking “substantial” acquisitions tied to wound care and minimally invasive surgery.
“People are worried and that creates uncertainty, but the market is not going to shut down,” said Philippe Cerf, Credit Suisse Group AG’s co-head of technology, media and telecommunications for Europe, the Middle East and Africa. “There are a lot of companies saying they are going after midsize strategic acquisitions,” though transformative deals may be on the back burner.
The U.S. Federal Reserve pledged today for the first time to keep its benchmark interest rate at a record low at least through mid-2013 in a bid to revive the flagging economic recovery.
If the market turmoil continues after the U.S. Labor Day holiday on Sept. 5, deals may slow down, said Moelis’s Raich.
“While some people will look to be opportunistic, it will be difficult to get deals done if the market is bouncing around as much as it has been the last couple of weeks,” he said.