Trillion-Dollar M&A Quarter Makes a Return for Better or WorseJeffrey McCracken
The $1 trillion M&A quarter, not seen since before the global financial crisis, is back.
Global deal volume this quarter is $992 billion, according to data compiled by Bloomberg that includes pending, completed and proposed transactions. That number puts this three-month period on pace to be the biggest for M&A since the third quarter of 2007 -- the best year ever for deals -- before Lehman Brothers Holdings Inc.’s 2008 bankruptcy gave Wall Street a near-death experience.
Unlike 2007, the tail end of history’s biggest leveraged buyout boom, this time the private-equity buyers are sitting things out. Instead, confident chief executives and shareholders who are rewarding risk-taking have companies tapping more than $4 trillion of cash on corporate balance sheets and low interest rates to fund deals.
“The last time we had this kind of run rate, back in 2007, a good amount of those deals involved private-equity buyers and the transactions were highly leveraged,” said Andrew Bednar, M&A partner at Perella Weinberg Partners LP in New York. “These more recent deals are on a better foundation, more compelling and more strategic.”
There were three $1 trillion-plus quarters in 2007 -- a year in which total M&A hit $4.8 trillion. Since then, the quarterly average has been about $650 billion, for annual volume of around $2.6 trillion. According to data compiled by Bloomberg going back 12 years, the $1 trillion in quarterly value was only breached six times, all in 2006 and 2007.
The 2007 rush marked a time when deals of questionable value were completed. The biggest was the $48 billion buyout of Energy Future Holdings Corp., formerly known as TXU, the Texas power company taken private in the biggest ever leveraged buyout. It filed for bankruptcy in April. Also announced in 2007 was the $20 billion buyout of Lyondell Chemical Co. and the Tribune Co. buyout led by real estate developer Sam Zell for more than $13 billion including debt. Both filed for bankruptcy.
Lehman Brothers and a partner bought apartment-complex company Archstone Inc. for more than $20 billion that year -- to sell it later at about a $6 billion loss.
In contrast, global deal volume this year can’t be attributed to private-equity deals. Instead, the year so far has been characterized by large corporate hook-ups, often cross-border in nature, many of which had been contemplated or discussed in previous years.
M&A volume in 2014 has reached $1.8 trillion.
The driver, dramatically so, is corporate purchases of at least $10 billion. The largest announced transaction of the quarter was AT&T Inc.’s purchase of DirecTV for about $67 billion, including debt. There was also the merger of Lafarge SA with Holcim Ltd., the biggest cement deal ever, and General Electric Co.’s proposed $17.1 billion purchase of Alstom SA’s energy assets, which would be its largest acquisition.
Additionally, a slew of large pharmaceutical deals has been announced since April, including Valeant Pharmaceuticals International Inc.’s $54 billion offer for Allergan Inc.; Bayer AG’s $14.2 billion purchase of Merck & Co.’s consumer-health products business; and Novartis AG’s $14.5 billion acquisition of GlaxoSmithKline Plc’s oncology unit.
This quarter’s numbers are skewed slightly by Pfizer Inc.’s so-far stifled effort to acquire AstraZeneca Plc for $117 billion, which is included in the data compiled by Bloomberg. Even without it, the second quarter of 2014 is still the strongest since before Lehman Brothers failed -- with three weeks left in the period.
The large deals compensate for a notable drop in the actual number of deals. So far this quarter there have been 5,626 transactions. In 2007, each $1 trillion quarter required more than 9,000 deals to hit that figure.
A different mindset in the boardroom is at play. The CEO Confidence Index -- a measure of confidence in the economy a year from now -- registered at 6.09 in April, according to Chief Executive Magazine. That’s near where it stood in late 2006 and double the level of early 2009. The index has been on a steady increase for three years.
While not every aggressive buyer has been rewarded -- shares of Tyson Foods Inc. are down almost 4 percent since it outbid Pilgrim’s Pride Corp. for Hillshire Brands Co. in a $7.7 billion deal -- investors are frequently showing their approval.
Merck’s shares rose this week after it agreed to pay the highest premium for any health-care deal of at least $100 million in its acquisition of Idenix Pharmaceuticals Inc. for $3.85 billion. Zimmer Holdings Inc. rose 11.5 percent on April 24 when it announced a $13.4 billion purchase of Biomet Inc.
“The drumbeat for buybacks and dividends has quieted down. Boards are in an era where they don’t want to just be good custodians,” Perella Weinberg’s Bednar said. “You don’t get credit as a CEO or boardmember for being that any more. Now investors want growth and efficient use of capital.”