M&A: Hot Spots in 2010

For the mergers-and-acquisitions market, there is no doubt 2009 is ending better than it began. The year is winding up with a "sigh of relief," says Morton Pierce, chairman of the M&A practice at law firm Dewey & LeBoeuf. In the past month the M&A market has built up some momentum. According to Bloomberg, deals in North America were valued at $115.6 billion in November, the most since September 2008. Compare that with late 2008 and early 2009, when dealmaking either wasn't happening at all or was centered in areas where deals absolutely needed to happen, such as failing financial institutions that needed buyers at any price. Deal volume in November was five times February's volume of $22.5 billion. Investors looking ahead to 2010 are wondering if this uptick in M&A can continue and where it will occur. Acquirers almost always buy at a premium, so traders can profit from correctly betting which industries will attract the most bidding activity. Small Tech DealsIn 2009, Internet stocks, the investment and financial services industries, software, and oil and gas production were among the most active, according to Bloomberg data. Expect more dealmaking among technology stocks, say M&A experts. Oracle Corp. (ORCL) is battling European regulators to finish its $7.4 billion acquisition of Sun Microsystems (JAVA). Such acquisitions, and especially much smaller deals, are a way of life for tech firms, says Daniel Mitz, a partner at law firm Jones Day who specializes in tech deals. "A lot of the innovation comes from smaller companies," Mitz says. Dealmaking in tech slowed but didn't stop during the downturn. There could be significant pent-up demand, Mitz says. "This is an industry that is ripe for M&A." One driver of a rebound for M&A in tech will be the strong financial positions of many tech firms, says Nadia Damouni, editor of dealReporter Americas, which tracks the M&A market. Another "cash rich" sector is health care, she says, but here the prospects for an M&A rebound are harder to read. The reason: Uncertainty surrounding the federal overhaul of the U.S.health-care system proposed by President Barack Obama and under discussion in Congress. "They're at the whim of health-care reform," Damouni says of the many insurers and health-care services companies that could be M&A targets at some point. In health care, the key ingredient for dealmaking is "stability," says Bob Filek, a partner at PricewaterhouseCoopers Transaction Services. If health-care reform passes—or even if it doesn't—acquirers will want some certainty about what federal policy will mean for health care before making bids. Filek envisions "a couple of scenarios where [the result could be] a lot of M&A activity." Limited ActivityOther hot industries in 2010, where Damouni sees more deal discussions happening, could be defense and even consumer products. But not all sectors will see a rosy 2010. And overall activity could still be constrained. "Activity will pick up," Mitz says. "But I don't think it's going to be a boom." Companies are finding it easier to borrow to complete deals than in the depth of the financial crisis. But it's still not easy. Len Blum, managing partner for investment bank Westwood Capital, says some potential buyers can't make bids because of a lack of access to financing. Expect smaller deals to dominate in 2010, as acquirers, especially private equity buyers, find those easier to afford, Blum says. That would continue a prominent trend in 2009. Until an uptick last month, the average size of deals in 2009 was tiny by recent historical standards. The average deal in July 2009, for example, was just $125 million, down from $427 million in July 2008 and $437 million in July 2007. The economy's worst industries are likely to continue to scare away dealmakers. Problem areas include gaming and casinos and the auto industry, Damouni says. Many companies in those industries are battling bankruptcy and dealing with creditors. Before those issues are resolved, she says, "It could be messy for a buyer to get involved." DivestituresPaul Schneir, managing director of M&A at KeyBanc Capital Markets (KEY), expects CEOs and boards to spend much of 2010 deciding which divisions to sell off. An example of a large deal of this type is General Electric's (GE) decision to sell its NBC Universal division to Comcast (CMCSA). Corporations are "drawing a line between what's core and what's not core," Schneir says. "There's nothing like a deep recession to force people to have a much sharper focus on their strategy." Most experts told Bloomberg BusinessWeek better conditions could lead to more M&A activity across a wide swath of the market. The biggest question, then, is whether those conditions—which include healthy debt markets, a stable stock market, and especially an improving economy—will continue in 2010.

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