Merger Machine Keeps Rewriting Record Books This Year

There was a mantra on Wall Street after the air was sucked from the merger market in 2008: Deals would return as soon as chief executive officers regained confidence.

Boy, have they ever.

From packaged food to drugs, cement, retail, cigarettes and oil, companies in almost every major industry are now attempting record or near-record takeovers. Here $50 billion, there $100 billion -- CEOs are willing to make huge bets as shareholders push for even more.

On Thursday, Avago Technologies Ltd. and Broadcom Corp. -- two semiconductor manufacturers -- announced the largest technology deal to date. They join other recent merger partners entering the record books: cable-TV providers Time Warner Cable Inc. and Charter Communications Inc. ($79 billion), cement makers Holcim Ltd. and Lafarge SA ($38 billion), and oil producers Royal Dutch Shell Plc and BG Group Plc ($79 billion -- all figures include net debt).

“It’s more confidence,” Rich Jeanneret, Americas vice chair of transaction advisory services at EY, said in a phone interview earlier this month. “People are just feeling good and seeing that M&A is being rewarded. It’s been a broad M&A recovery.”

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Kraft Foods Group Inc. and H.J. Heinz are also being merged, in the biggest food deal led by the world’s most famous investor, Warren Buffett. And medical-device makers Medtronic Plc and Covidien Plc combined, successfully overcoming the U.S. Treasury’s attempts to curtail such tax-inversion deals.

Economic Expansion

The U.S. economy is expanding again, leading the way for the world’s recovery from the financial meltdown and giving corporate executives reason to be optimistic. It also helps that corporate cash piled up with no better use than acquisitions after interest rates were lowered to near zero.

And now, there’s a sense of urgency: Federal Reserve Chair Janet Yellen has already signaled rates won’t stay this low for much longer.

There have been $1.3 trillion of mergers and acquisitions announced in 2015, according to data compiled by Bloomberg, excluding terminated offers. That’s only about $60 billion shy of the tally needed to put 2015 on track to overtake 2007’s record.

The biggest deal of all time has yet to surface from the current wave. AOL Inc.’s 2000 merger with Time Warner Inc. still ranks as the largest transaction ever, at $186 billion including net debt. It’s also widely regarded as one of the worst deals in history because billions of dollars of shareholder value were destroyed and the merger was later undone.

Growth Motive

Unlike the empire-building and diversification theme of years past, companies are now seeking mergers that will provide new sources of growth. They’re also consolidating similar businesses while parting with ones that are no longer a good fit because investors currently favor more narrowly focused companies.

Thursday’s announced merger of chipmakers Avago and Broadcom for $37 billion would be the biggest in tech. Even so, it pales in comparison to the mega-mergers seen in other industries. That may in part be explained by the fact that many tech companies were already growing quickly on their own, so they didn’t need to do big deals to juice earnings. Their stocks also tend to trade at richer valuations, a drawback for would-be suitors.

This may change, though, as some of the bigger tech companies start facing their own growth hurdles. Inc., valued at $48 billion, was approached by a potential bidder and is now fielding takeovers offers, people familiar with the matter said in April. Should a deal materialize, it would surpass the Broadcom purchase.

Frothy Valuations

Tech isn’t the only industry where valuations have gotten frothy. Bidding wars for pharmaceutical and biotechnology targets have driven takeover premiums to unprecedented heights as industry leaders seize new, innovative medicines for diseases such as cancer.

For now, companies worldwide are still getting swept up in the merger wave. But time will tell if these mega-mergers are worth the money.