M&A: An Irresistible Urge To Merge

The dealmakers will be working double time in '07, and in virtually every sector.

For dealmakers, life hasn't been this good in years. Companies awash in cash and blessed with a benevolent economy, along with private equity players whose piles of capital keep growing, are driving mergers and acquisitions to new records, eclipsing much of the blockbuster action at the turn of the century. When the final tallies are in, dealmaking around the globe should surpass $3.44 trillion, nosing ahead of the $3.41 trillion record set in 2000 and moving up sharply from 2005's $2.74 trillion, according to Thomson Financial (TOC ). The U.S. total, likely to climb beyond $1.39 trillion, will fall below the $1.71 trillion of 2000 but will finish well ahead of 2005's $1.15 trillion.

Next year could be even stronger. Dealmaking should accelerate in mining and energy, manufacturing, health care, finance, media, and transportation, according to analysts at Standard & Poor's (MHP ). That should offset a slowdown expected in information technology and telecom. "Companies certainly have enough faith in not only the overall growth of the economy but also the growth potential of their own sectors," says Sam Stovall, chief investment strategist for S&P, which, like BusinessWeek, is part of The McGraw-Hill Companies (MHP ).

There may be no hotter sector than finance. Take the headline-grabbing mergers among the stock and futures exchanges that are battling for domination of the public capital markets--the Chicago Mercantile Exchange (CME ) is gobbling up the Chicago Board of Trade (BOT ) in an $8 billion deal, the New York Stock Exchange (NYX ) is buying Paris-based Euronext for about $14.6 billion, and the NASDAQ Stock Market (NDAQ ) is pursuing the reluctant leaders of the London Stock Exchange in a deal expected to top $5.2 billion. The surviving players and rivals, such as Europe's Deutsche Börse, are likely in 2007 to chase after partners in other venues, particularly in the Asian markets.

THE SUCCESS OF THESE big deals could spark activity in other areas of finance. Bankers who've been coy about getting together, despite the overcapacity that plagues their industry, could find more common cause. "Our expectation is that M&A is going to pick up," says Thomas B. Michaud, president of investment bank Keefe, Bruyette & Woods (KBW ). The likely targets? Smaller banks that are feeling pressure on their earnings, thanks in part to the housing industry slowdown, just as bigger banks are looking to buy. JPMorgan Chase (JPM ), Citigroup (C ), and HSBC (HBC ) could swoop in on such prey as Washington Mutual (WM ), a prominent name on KBW's list of targets. The firm figures WaMu could fetch as much as $55 a share, a respectable premium over its current $44, if it starts weakening. "If WaMu stumbled, it would make it more likely to be acquired," says Michaud.

Parts of the tech sector could prove hot, too, for a second year. After all, the biggest deal of 2006 was AT&T (T )'s $83 billion purchase of BellSouth Corp. (BLS ) While the broader telecom sector should slow, more wireless telecom outfits, some of which are joint ventures by the likes of AT&T or Verizon Communications (VZ ), could be pushed together by the rise of WiMAX, a wireless broadband alternative to cable and DSL that's giving the industry a jolt. Smaller players such as Alltel Corp. (AT ) and US Cellular are vulnerable, according to Kenneth M. Leon, an analyst with S&P. A cable operator could even plunge in and acquire the industry's only major independent nationwide wireless company, Sprint Nextel Corp. (S ), Leonsays.

Software remains a fertile area for M&A action. Tech giants such as EMC, Hewlett-Packard (HPQ ), and Microsoft (MSFT ) are very much on the prowl. Hewlett-Packard Co. beat out EMC to acquire Mercury Interactive Corp., agreeing to pay $4.5 billion for the outfit, which makes testing software. EMC shelled out $2.1 billion for RSA Security Inc. Candidates for a takeover now, says S&P analyst Zaineb Bokhari, include Quest Software (QSFT ), Hyperion Solutions (HYSL ), and Informatica. Overall, the number of tech deals in 2007 should surpass those in '06, figures Boston investment bank Innovation Advisors. And 2006 was already a record-setter in the number of deals, estimated at 3,945--behind only 2000 in dollar value, at an estimated $248.4 billion. In 2000, dealmakers racked up $490 billion worth of tech deals, counting 2,871 of them, IA says.

IN THE OIL PATCH, growth-hungry energy companies could fuel another round of consolidation. Potential targets include Forest Oil (FST ), Plains Exploration & Production, (PXP ) and Cabot Oil & Gas (COG ), say analysts at Wall Street Access Corp., an independent research firm in New York. Analyst Bernard J. Picchi says the cost of buying a company is so much lower than the cost of starting new production that big ones, such as Marathon Oil (MRO ), Hess (HES ), and Anadarko Petroleum (APC ), could reap huge gains in takeovers. Says Picchi: "It's going to be a huge year for M&A in the energy industry."

Along with hungry corporate buyers, private equity money in 2007 could drive many more deals across the board. A consortium of four private equity outfits, led by Blackstone Group, surprised industry watchers in November when it beat out a rival quartet led by Kohlberg Kravis Roberts & Co. to pay $17.6 billion for Freescale Semiconductor Inc. (FSL ), a Texas-based Motorola spin-off. It marked a new direction for the buyout barons, who are generally drawn to stable outfits with predictable cash flows that promise reliable debt payments. In the past, they have largely shunned volatile sectors such as chips. But with billions of dollars that must be put to work--more than $220 billion raised in just the first three quarters of 2006, according to Thomson Financial--the private equity buyers are out in force and eyeing less-likely areas.

With mountains of cash and an agnostic approach toward the industries they move into, private equity firms are looking far and wide. As they spread their influence, such giants as Blackstone, Bain Capital, and Thomas H. Lee Partners are setting the pace for more megadeals in 2007. Blackstone is snapping up commercial real estate powerhouse Equity Office Properties Trust (EOP ) for $36 billion, including the assumption of debt, in the biggest private equity deal ever, eclipsing the $33 billion 2006 takeout of hospital company HCA Inc. Likewise, Bain and Lee are hauling in radio giant Clear Channel Communications Inc. (CCU ) for $27 billion, including debt.

Whether it's private equity players driving the deals or companies that see the virtue of joining together, the activity is likely to be bustling in lots of sectors. "It's not like the last M&A boom, when technology deals were dominant," says Gordon Dyal, global head of mergers and acquisitions for Goldman Sachs Group Inc (GS ). "It's much more balanced across industry and regions." With his own backlog of pending deals now just about as rich as it was for much of 2006, Dyal expects '07 to be at least as busy.

And as Asian and Russian companies continue to grow more prominent, dealmakers expect transactions among them to garner attention in 2007. Europe, already toe to toe with the U.S., could prove even more of a factor in the coming year. With globalization on the rise, M&A pros won't be shy about crossing borders.

By Joseph Weber

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