Let's Make a Deal

After a long M&A drought, Corporate America is shopping around again

Supermarket giant Albertson's Inc. (ABS ) hasn't made a sizable acquisition since 1999. Executives at the Boise (Idaho)-based company figured there was no point. Sellers, they said, still had delusions of collecting the grand prices of the bubble years. But reality finally seems to be setting in, and that's partly why Albertson's says that it will go after some big fish in the coming year. "Sellers' heads are now coming out of the clouds," says Eric J. Cremers, a senior vice-president of corporate strategy and business development at Albertson's, adding that the company has a lot of deals "in the hopper."

Talk to executives in other industries, from software to banking, and they say much the same thing: It just might be time for Corporate America to go shopping. They say a confluence of global and economic factors -- from signs that the values of companies are stabilizing to relief that the war in Iraq is wrapping up -- has created a more fertile ground for dealmaking. Could it be the long-anticipated turning point in merger-and-acquisition activity is at hand? "For a long time, buyers didn't want to make acquisitions because they didn't want to look foolish if the market went lower," explains Paul F. Deninger, chairman and CEO of Broadview International LLC, an investment bank focused on technology. "And sellers didn't want to look foolish if the market went up. Now people are no longer waiting for a set of market conditions that doesn't exist."

Evidence of this psychological shift is just emerging. Deninger says he has seen a startling jump in the number of companies interested in launching M&A discussions. Of the 100 largest technology companies, which includes Cisco Systems (CSCO ), Intel (INTC ), and Microsoft (MSFT ), he says just 10% were open to doing acquisitions 18 months ago. Now, he says that number is more like 60%. "It's a huge difference," says Deninger. "People see this as a great buying opportunity."

Look no further than Wells Fargo & Co. (WFC ) With 450 acquisitions under its belt in the past 15 years, the San Francisco-based bank has been one of the most aggressive acquirers in the world. But Wells Fargo hasn't bought any banks in 12 months, a stark contrast to its regular pace of at least 15 a year. CEO Richard M. Kovacevich says Wells Fargo didn't want to do deals as long as political and economic uncertainty kept the bank and potential sellers from seeing eye-to-eye on price. But now he senses that the environment is improving and acknowledges that Wells Fargo is in "moderate talks" with sellers. "The reason companies might be getting ready for more activity is we've removed some level of uncertainty," he says.

Another reason is that in many industries there are just too many companies. Nowhere is this more true than in technology. Steve Milunovich, a technology analyst with Merrill Lynch & Co., estimates there are at least 400 companies that probably won't survive on their own for reasons ranging from a lack of customers to financial difficulties. Consequently, he predicts "an acceleration of consolidation this year."

Companies are also facing mounting pressure to focus on revenue growth now that most of the cost-cutting work is behind them. And the fastest way to boost revenues is to buy rivals. Albertson's Cremers says he was brought on board last year for that reason. He says the chain, as well as its competitors, can't grow enough by merely opening new stores. "People realize how challenging it is to grow our business organically, without acquisitions," he says.

Companies also are responding to changing customer demands. Most companies are intent on reducing the number of vendors they use, preferring one-stop shops. That's why Network Associates Inc. (NET ), a security-software company in Santa Clara, Calif., has done six deals since August. "Customers want to work with fewer strategic vendors," says Sandra England, an executive vice-president at Network Associates. "The technologies available to buy are good and worth the money to companies like us."

Don't expect to see an uptick in deals showing up in the data yet. In the first quarter of 2003, the value of U.S. deals was off 17% year-over-year, according to Dealogic, a research firm in New York. With the uncertainty of when war would start, and then the war itself, the first quarter was expected to be anemic. That's why few investment bankers are ready to call the increased interest in M&A a turnaround, let alone the prelude to a boom. Although the war is no longer as large a factor, the economic landscape at home is far from solid, giving many companies pause as they consider their strategic options. Says investment banker Jack Levy of Goldman, Sachs & Co.: "Other than in Europe [where the value of deals rose 32% in the first quarter]. The transaction flow today is flat, but there is reason to hope that the M&A business will improve in the next six to 12 months."

Dealmakers certainly hope so. After a miserable period of little activity and huge layoffs, they're looking at the recent trends as a sign their ailing business may finally be on the mend. One banker with a major firm says he worked three weekends in a row because of a sudden spike in merger discussions. "Everyone is worried about what the other guys are buying," this banker says. And that might be the best news of all for the industry.

By Linda Himelstein, with Louise Lee, Jim Kerstetter, and Peter Burrows in San Mateo, Calif.

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