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M&A Sees August Revival as Companies Tap $3 Trillion

Intel Corp. Chief Executive Officer Paul Otellini. Photographer: Andrew Harrer/Bloomberg
Intel Corp. Chief Executive Officer Paul Otellini. Photographer: Andrew Harrer/Bloomberg

Companies sitting on almost $3 trillion in cash are starting to spend it, putting what is typically the slowest month for mergers and acquisitions on course to be the busiest this year.

Intel Corp.’s purchase of security-software maker McAfee Inc. yesterday brings the total value of announced takeovers to more than $175 billion, setting the pace for August to surpass March as the biggest month for deals this year, according to data compiled by Bloomberg. Seven of the 10 largest deals are in cash, including BHP Billiton Ltd.’s $39 billion hostile bid for Potash Corporation of Saskatchewan Inc. and Vedanta Resources Plc’s takeover of Cairn India Ltd.

“Cash on corporate balance sheets is at historically high levels and interest rates are expected to remain low,” said Paul Parker, head of global mergers and acquisitions at Barclays Capital in New York. His firm is helping fund BHP’s offer for Potash Corp. “We will continue to see a lot of all-cash or mostly cash offers.”

Whether those deals materialize will depend in part on the economy in the U.S., the biggest market for M&A. The Standard & Poor’s 500 Index lost 1.7 percent yesterday, led by declines in Wells Fargo & Co., General Electric Co. and Exxon Mobil Corp., after claims for U.S. jobless benefits jumped to their highest level since November last week, and Philadelphia-area manufacturing shrank for the first time in a year.

Cash Piles

The global economic slump that began in 2007 crimped chief executive officers’ enthusiasm for takeovers, cutting the annual pace of dealmaking in half by 2009. Excluding the financial-services industries, the 1,000 biggest companies by market value worldwide have amassed about $2.86 trillion in cash and equivalents based on their latest filings, according to data compiled by Bloomberg.

“Cash is not only on the sidelines, but actually it’s growing every single day,” said Frank Aquila, a partner at Sullivan & Cromwell LLP, in an interview on Bloomberg Television. “All we need to see, though, is a catalyst, and I think that catalyst is going to be some assurance the economy has bottomed out, we’re not going to have a double dip or we’re going to have some sort of fairly strong global recovery.”

If the pace of global mergers continues this month, the value of deals in August will reach $285 billion, according to Bloomberg data. That total would eclipse $200.3 billion in March after MetLife Inc. agreed to buy an American International Group Inc. unit for $15.5 billion.

Record August

“There is no August this August,” said Bob Profusek, head of M&A at Jones Day, in a Bloomberg Television interview. The law firm is representing Potash Corp. in rejecting BHP’s bid. “There’s a lot in the pipeline.”

The busiest August on record was 2007, at the end of the private-equity boom, when companies racked up $297.4 billion of deals.

Intel, the world’s largest chipmaker, agreed to pay $7.68 billion in cash for McAfee in its biggest purchase to date. Technology and telecommunications are among the most cash-rich companies globally, led by Santa Clara, California-based Intel, Apple Inc., Oracle Corp., Cisco Systems Inc., Microsoft Corp., Google Inc., Sony Corp. and China Mobile Ltd.

Korea National Oil Corp., today made a hostile 1.87 billion-pound ($2.9 billion) cash bid for U.K. oil explorer Dana Petroleum Plc after its takeover offer was rejected. First Niagara Financial Group Inc., a Buffalo, New York-based bank, said yesterday it agreed to buy Connecticut’s NewAlliance Bancshares Inc. for about $1.5 billion in cash and stock.

All Cash

Cash takeovers are playing a bigger role in the merger market this year. Some 68 percent of transactions by dollar value involve cash or cash and debt this year, compared with 62 percent last year, according to data compiled by Bloomberg.

The 10 lowest-yielding U.S. corporate bond deals ever were sold in the past 14 months, according to Deutsche Bank AG. International Business Machines Corp. issued $1.5 billion of three-year notes on Aug. 2 with a record-low 1 percent coupon, while Johnson & Johnson sold $1.1 billion of 10-year and 30-year bonds last week, also at record-low rates for securities with those maturities.

Credit Suisse Group AG agreed to provide the biggest high-risk, high-yield debt package to finance an acquisition this year. Reynolds Group Holdings Ltd., owned by New Zealand’s richest man, Graeme Hart, may use $5 billion in leveraged loans and junk bonds to buy Pactiv Corp., the maker of Hefty trash bags.

Taking Advantage

Nestle SA, Europe’s largest company by market value, stands to receive $28.1 billion from Novartis AG for its majority stake in Alcon Inc. Nestle, based in Vevey, Switzerland, agreed this month to buy Vitaflo, a U.K. maker of nutrition products for people with metabolic disorders, as well as a majority stake in Guatemalan food and powdered-beverage maker Malher.

Caterpillar Inc. had $3.6 billion in cash at the end of June, and shareholders expect the Peoria, Illinois-based company to put the money to work, Chief Executive Officer Doug Oberhelman said yesterday. Internal growth will be a priority, and Caterpillar is interested in acquisitions, too, he said.

“There are lots of opportunities in and around our businesses, around the world,” Oberhelman said in a meeting with analysts at the New York Stock Exchange. “We intend to use the strength of our balance sheet in a big way to take advantage of that, while we can, at this early stage of the recovery from recession where valuations and prices are right.”

While companies are beginning to acquire, deal volume is still below the boom years of 2006 and 2007, when $3.51 trillion and $4.02 trillion of deals were announced, respectively, according to data compiled by Bloomberg. Those levels may not be reached anytime soon.

“While the pipeline is absolutely bursting, getting from inception to completion is still a tricky process,” Jones Day’s Profusek said. “There is still a sense of risk aversion.”

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