Takeover Rebound Falters as European Woes Overshadow U.S.

The global rebound in mergers and acquisitions stumbled in the third quarter as takeovers by U.S. and Asian acquirers failed to compensate for a 42 percent decline in purchases by European companies.

Dealmaking dropped 21 percent to $510 billion from the prior three-month period, according to data compiled by Bloomberg, as European suitors retreated. St. Louis-based Express Scripts Inc.’s $29.1 billion bid for Medco Health Solutions Inc. and Tokyo-based Nippon Steel Corp.’s $9.5 billion offer for Sumitomo Metal Industries Ltd. blunted the drop.

U.S. and Asian companies are putting stockpiles of cash to work as a dimming economic outlook makes it more difficult for them to expand on their own. While their counterparts in Europe are also seeking growth, the deepening debt crisis there discouraged some from pursuing deals.

“The broader economic climate in Europe is bringing uncertainty to decision-making,” said Hernan Cristerna, head of M&A for Europe, the Middle East and Africa at JPMorgan Chase & Co. (JPM), the top adviser on deals this year. “New mandates have been coming through, but we are realistic that it might be difficult to execute some of them in the current environment.”

The rout in Europe imperils what is on track to be the second year of a global recovery in dealmaking. Companies have struck $1.79 trillion of deals this year, 18 percent more than the $1.52 trillion they put together at the same point in 2010.

U.S. Versus Europe

For every $2 U.S. companies spent on acquisitions in the third quarter, European ones spent less than $1. For most of the past decade, U.S. and Europe disbursed about the same amount.

U.S. deals included two big bets by technology giants: Google Inc.’s $12.5 billion offer for Motorola Mobility Holdings Inc. (MMI) and Hewlett-Packard Co.’s proposed $10.3 billion acquisition of U.K. software maker Autonomy Corp. Melbourne’s BHP Billiton Ltd. bought Houston-based Petrohawk Energy Corp. for about $12 billion, its largest acquisition.

“We are continuing to see healthy activity in both the tech and in natural resources sectors, but the macro environment is such that CEOs are being prudent,” said Yoel Zaoui, global co-head of M&A at Goldman Sachs Group Inc.

Goldman Sachs is second to JPMorgan in advising on transactions this year. Morgan Stanley and Credit Suisse Group AG (CSGN) round out the top four.

Developing Countries

Asian and Latin American companies are providing much of the buying power in M&A, speakers at the Bloomberg Dealmakers Summit said today in New York. Emerging markets are “the only place to go for growth,” said Alan Schwartz, executive chairman of Guggenheim Partners LLC. He spoke on a panel about the global outlook for dealmaking alongside Centerview Partners’ Blair Effron and Gary Parr, vice chairman at Lazard Ltd.

Stabilizing the European banking system will be key to continued growth in global M&A, Parr said. A number of European banks need capital injections, and liquidity guarantees from governments will be required, he said.

Deal volume in the third quarter sank alongside the outlook for the global economy. Spanish and Italian government bond yields increased to euro-era records during the quarter as Greece attempted to avoid default. In the U.S., credit concerns increased as Standard & Poor’s lowered the nation’s rating, saying lawmakers haven’t done enough to curb record budget deficits.

Financial Services

Deals in financial services, particularly exposed to the crisis in Europe, will be rare as long as valuations remain low, said Jonathan Pruzan, co-head of Morgan Stanley (MS)’s financial-institutions investment-banking group.

“One of the impediments right now from the sellers’ perspective is valuation,” Pruzan said today at the conference. “Until there’s a two-way market, activity is going to be very, very slow.”

Bank executives are hesitating before agreeing to deals until regulations defining systemically important financial institutions are set, said banking lawyer H. Rodgin Cohen, senior chairman at Sullivan & Cromwell LLP.

“If you make any acquisition of size, that alone could bring you into the next higher bucket,” Cohen said, referring to capital ratio requirements. “Who could afford a deal of any size if the consequence was to give you even a 0.5 percent increase on your capital ratio for your entire operations? Returns would need to be astronomical to justify that.”

Stretched Timelines

Financial services is not the only industry hit by the slowdown, according to Giuseppe Monarchi, head of M&A for Europe, the Middle East and Africa at Credit Suisse in London.

“Timelines are being stretched, and whether these deals ultimately get done remains an open question,” Monarchi said.

PPR, the French owner of luxury brands such as Gucci, shelved plans this month to sell its Redcats online retail unit, partly because of the financing squeeze. The Paris-based company initially attracted buyout firms such as TPG Capital and CVC Capital Partners Ltd., people with knowledge of the matter said in July.

Some companies are opting for spinoffs or breakups rather than takeovers. Kraft Foods Inc., whose brands include Oreo cookies and Cadbury chocolate, last month revealed plans to spin off its North American grocery business. Tyco International Ltd., the security-system maker that fielded advances from Schneider Electric SA this year, announced plans for its own breakup this month.

Spinoff Option

“For now, we’ll continue to see strategic reorganizations, such as spinoffs and divestitures, and some sizable acquisitions by companies with substantial cash reserves,” said Henrik Aslaksen, global head of M&A for Deutsche Bank AG (DBK) in London. The top 1,000 non-financial companies worldwide are sitting on about $3.3 trillion in cash and equivalents, according to data compiled by Bloomberg.

Siemens AG Chief Executive Officer Peter Loescher said Sept. 24 that the German maker of trains, scanners and power plants is seeking acquisitions and that prices are becoming “more attractive by the day.” Nestle SA, which had more than $3 billion in cash and equivalents at the end of June, said in August that it opted not to buy back more shares, prompting speculation it’s saving for takeovers.

Asian Deals

Acquirers in the Asia-Pacific region kept spending in the third quarter, with volume climbing about 5 percent to $160 billion from the previous period, including Nippon Steel’s deal to create the world’s second-largest steelmaker.

“Given the undiminished appetite of Asian corporates for M&A opportunities globally, combined with their strong overall financial positioning, we don’t expect any slowdown in M&A activity to be long drawn out,” said Colin Banfield, Asia-Pacific head of M&A at Citigroup Inc. (C)

Still, much like in Europe, market turmoil has put off or quashed some large transactions clients had contemplated, said Stephen Gore, head of M&A for Asia at UBS AG. (UBSN)

“Trying to take a decision to execute a large, transformational transaction when there is a high level of global uncertainty about macro-economic conditions is difficult,” he said.

The International Monetary Fund reduced its forecast for global growth Sept. 20 and said Europe and the U.S. risk re-entering recession if they fail to solve their financial problems. The world economy probably will expand 4 percent this year and next, the IMF said, compared with previous projections of 4.3 percent and 4.5 percent.

Slowing economic growth may actually push some companies to seek acquisitions, to realize cost savings or enter new markets, said Patrick Ramsey, co-head of Americas mergers at Bank of America Corp. (BAC)

“The challenge of organic growth has only gotten harder as the slope of economic recovery has become shallower,” he said.

To contact the reporters on this story: Zachary Mider in New York at zmider1@bloomberg.net; Jacqueline Simmons in Paris at jackiem@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net

To contact the editors responsible for this story: Jacqueline Simmons at jackiem@bloomberg.net; Jennifer Sondag at jsondag@bloomberg.net

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