GE Signals Time to Strike Is Now as Deals Surge: Real M&ABrooke Sutherland and Tara Lachapelle
General Electric Co. and Holcim Ltd. are sending a message to their industrial peers: The iron’s hot.
GE’s pursuit of Alstom SA is contributing to the biggest month on record for industrial deals, according to data compiled by Bloomberg. Corporations that hoarded cash during the global economic slump are now regaining the confidence to deploy those funds on deals that will help them expand and gain market share as fortunes revive, Wells Fargo Funds Management said.
GE and cement maker Holcim, which this month announced a $40 billion merger with Lafarge SA, are joining drug and technology dealmakers that thrust global mergers and acquisitions to the highest dollar amount since 2007, data compiled by Bloomberg show. By striking now, GE can add to its overseas manufacturing capabilities while European stocks are still inexpensive, with Alstom’s valuation near its lowest on record, said Huntington Asset Advisors Inc.
Industrial companies “would be reticent to make big capital commitments if they didn’t have confidence,” Walter Todd, who oversees about $975 million as chief investment officer at Greenwood Capital Associates LLC, said in a phone interview. “There’s a lot of cash on the balance sheet, companies are looking for ways to improve their growth profiles. So all the variables are there” for more deals.
An agreement between GE and $11.5 billion Alstom may be announced as early as next week, according to people with knowledge of the matter, who asked not to be identified because the talks are private.
Including that potential transaction, April marked the busiest month on record for industrial deal activity with about $69 billion of transactions so far, according to data compiled by Bloomberg that dates back to 2002.
“But it’s not just an industrial phenomenon,” says Michael Shaoul, who oversees more than $20 billion as chairman and chief executive officer of Marketfield Asset Management LLC.
He’s right. In the first quarter, more than 5,000 mergers or acquisitions were struck across all industries globally for a total of $660 billion, a post-financial crisis high, data compiled by Bloomberg show.
“Right now, almost any deal could be put together with attractive financing, where the Excel spreadsheet tells you it’s a plus, not a minus,” Shaoul said in a phone interview from New York. “We’re exactly five years into a recovery in global corporate profitability, and you have a bond market that’s open for business at ridiculously low rates. Now, corporate management teams are starting to build this mentality that they’re going to be a buyer or be bought.”
Volume so far this year among industrial corporations is almost double what it was during the same period of 2013, the third-biggest increase among all sectors, the data show.
While pharmaceuticals and technology also have been active for deals, they are often higher-growth industries and aren’t as sensitive as industrial companies to changes in economic sentiment, said Eric Green, director of research at Philadelphia-based Penn Capital Management Co. The fact that industrial deal activity is rebounding signals a strong improvement in CEOs’ confidence, he said.
“M&A is clearly back in industrials,” Joel Levington, an analyst at Bloomberg Industries, said in a phone interview. Signs of an improving economy “give CFOs and CEOs more confidence to go out and pull the trigger on an acquisition.”
Industrial production at U.S. factories rose more than forecast in March after a February gain that was twice as big as previously estimated. Growth in the U.S. is projected to reach
2.7 percent this year, compared with 1.9 percent in 2013, according to a Bloomberg survey of economists. In the euro area, economists forecast expansion this year for the first time since 2011, data compiled by Bloomberg show.
Other industrial transactions announced this year include Martin Marietta Materials Inc.’s takeover of cement maker Texas Industries Inc., Illinois Tool Works Inc.’s sale of its industrial-packaging business to Carlyle Group LP for $3.2 billion and Rolls-Royce Holdings Plc’s purchase of Daimler AG’s 50 percent stake in their engine joint venture.
Companies that played it safer and funneled cash toward stock repurchases may now be driven to seek acquisitions and better position themselves for a rebound, said John Manley, chief equity strategist for Wells Fargo Funds Management, which advises $231 billion in the Wells Fargo Advantage Funds.
“We’ve been in a slump for some time,” Manley said in a phone interview from New York. “There is some catch-up to be done. Now that consumer demand is looking better, you don’t want to be the last one in your space to expand because it will cost you market share, which is very hard to get back.”
For GE, Alstom is a “productive acquisition” that would help bolster its international presence amid a renewed focus on infrastructure, said Peter Sorrentino, a Cincinnati-based money manager at Huntington.
GE shares rose 0.5 percent to $26.60.
The deal also could help the maker of airplane engines and refrigerators reduce manufacturing and shipping costs, he said. Plus, GE would be getting Alstom when it’s relatively inexpensive -- the company fell to its lowest price-earnings multiple on record last month, according to data compiled by Bloomberg.
“Bottom line is, the deal makes sense and they’ve got the balance sheet to do it,” Sorrentino, whose firm oversees about $14.7 billion including GE shares, said in a phone interview. “It’s kind of the GE hallmark of going in when things are weak.”
The company can “pick up really good, quality assets on the cheap that will pay them back in years to come,” he said.
Holcim and Lafarge’s merger and a GE acquisition of Alstom are likely heralding more deals, said Todd of Greenwood Capital, which is based in Greenwood, South Carolina. And not just industrials, as investors send the stocks of acquirers climbing, according to Green of Penn Capital.
“We’re going to see deals in every sector,” Green, whose firm oversees about $7.7 billion, said in a phone interview. “The market is rewarding acquisitions. The market likes this kind of stuff.”