Deal Rush Pushes Takeovers to Most Expensive Since Lehman
Corporate executives in the first quarter paid the most for takeovers since before the collapse of Lehman Brothers Holdings Inc. (LEHMQ), kicking off what investment bankers say may be the busiest year for deals since 2007.
Acquirers paid a median 9.2 times earnings before interest, taxes, depreciation and amortization for companies in the period, the most since the second quarter of 2008, according to data compiled by Bloomberg. Valuations are still lower than during the last M&A boom, when they peaked at 11.4 times Ebitda.
AT&T Inc. (T), Duke Energy Corp. (DUK), and Deutsche Boerse AG (DB1) announced deals to leapfrog their biggest rivals, bringing takeovers to $567 billion as of March 29 and beating last year’s pace, Bloomberg data show. Shareholders are pushing executives to part with the funds they amassed in the recession and make bold moves, according to Andrew Bednar, a founding partner at investment bank Perella Weinberg Partners LP in New York.
“Equity markets will not reward corporate executives for managing cash,” said Bednar, who is advising NYSE Euronext on its $9.3 billion merger with Deutsche Boerse and counseled J. Crew Group Inc. directors on a sale to TPG Capital. “They will be measured by how well they strategically invest cash.”
The value of global takeovers may increase 15 percent to 20 percent this year, extending a 27 percent rebound in 2010, according to estimates from Bednar and David DeNunzio, a vice chairman at Credit Suisse Group AG. (CSGN) Last year’s jump to $2.22 trillion followed the slowest 12 months for deals since 2003.
Buyers, sitting on more than $3.3 trillion of cash globally, were undeterred by market volatility triggered by rebellions in the Middle East, $100 a barrel oil and the earthquake and tsunami in Japan.
“The pent-up appetite for dealmaking does seem to be coming unleashed,” said Scott Sonnenblick, a partner at Linklaters LLP in New York. “Japan put a blip in credit markets, but that’s a problem of weeks, not of months.”
The market reaction to deals is helping boost executives’ confidence, said Patrick Ramsey, co-head of Americas mergers and acquisitions at Charlotte, North Carolina-based Bank of America Corp. (BAC) In some of the quarter’s biggest deals, shares of both buyers and sellers surged on the announcements.
AT&T has climbed 9.9 percent to its highest level since 2008 since disclosing its $39 billion planned purchase of Deutsche Telekom AG (DTE)’s T-Mobile USA unit this month. Valeant Pharmaceuticals International Inc. (VRX) surged 13 percent today on the New York Stock Exchange after the Canadian drugmaker made an unsolicited bid to buy Cephalon Inc. (CEPH) for about $5.7 billion.
“Investors are applauding strategic activity,” Ramsey said.
At the same time, shareholders are less willing to defer to management’s judgment on takeover valuations, said Credit Suisse’s DeNunzio. In one of the biggest transactions to fail this year, shareholders of Dynegy Inc. (DYN) scrapped a sale to Carl Icahn in February, three months after a previous effort to be bought by Blackstone Group LP (BX) also collapsed. Investors are challenging the sales of Smurfit-Stone Container Corp. (SSCC) and Danisco A/S.
“You’re going to see more merger votes become problematic,” said DeNunzio, who is based in New York.
Premiums have dropped to the lowest since the third quarter of 2007. Public companies demanded an average 17 percent premium to sell themselves in the quarter, down from 31 percent at the start of 2009, after the Standard & Poor’s 500 Index jumped more than 90 percent from its March 2009 low.
“Companies recognize the importance of being focused on core businesses,” while investors are playing an increasing role in urging companies to consider breakups, said Robert Kindler, head of M&A at Morgan Stanley (MS), which topped Bloomberg’s M&A league tables in 2010 and is second so far this year.
Sara Lee Corp. (SLE), Marathon Oil Corp. (MRO), ITT Corp. (ITT), Marriott International Inc., and Fortune Brands Inc. (FO) all disclosed plans to split into two or more pieces in the past few months. In the cases of Fortune and ITT, the announcements came after activist investors built stakes.
Consolidation is taking place across virtually all industries, with natural resources and financial services remaining busy, said Henrik Aslaksen, Deutsche Bank AG’s London- based global head of mergers. Goldman Sachs Group Inc. (GS) analysts this month forecast that Allergan Inc., Citrix Systems Inc. (CTXS) or Mead Johnson Nutrition Co. (MJN) may be the next big takeover target.
“There are very good levels of activity and visibility into the second quarter is pretty good,” said Hernan Cristerna, JPMorgan Chase & Co. (JPM)’s head of European M&A in London. JPMorgan took the biggest share of M&A advisory work in the quarter. “It’s too early to tell how macro events will affect the market, but there is a real ‘can do’ attitude among companies and that is a different sentiment to this time last year.”
To contact the reporter on this story: Zachary R. Mider in New York at email@example.com