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Merger & Acquisition Special Report
The Smart Profits Report: Issue #426
Wednesday, June 6, 2007
Merger & Acquisition Special Report: Global M&A Just Hit $2.2 Trillion
by Martin Denholm
Managing Editor, Mt. Vernon Research
If love and marriage go together like a horse and carriage, then corporate America is off to the races in a big way - and feeling pretty darn frisky in the process! The economy is slowing. The dollar is crumbling. Oil and gasoline prices are rising. But executives across the country don’t seem too bothered. Like a drunken frat boy, they’re only too happy to flash the cash at any pretty young fillie who looks their way.
There must be something in the air at this time of year. With May 2007 in the books, a mad blitz of corporate wheeling and dealing is poised to make this month the best since May 1998 for merger and acquisition (M&A) activity. Over the past month, U.S. companies have racked up $191 billion in total deal value.
That brings the total value of U.S. M&A deals done so far in 2007 to $830 billion, well on pace to beat the record set in 2000. But it’s not just the U.S. that has the urge to merge. The M&A party is a worldwide affair, with the long trend showing no sign of stopping…
May Was The Month To Merger
May was a record month for global merger and acquisition activity, with the total value of done deals hitting $496 billion. For the year to date, the number has surged to $2.2 trillion - a 60% spike from the same period in 2006.
Just five months into 2007, that’s an enormous figure, especially when the global total in 2006 was a record $3.8 trillion. We’re well on pace to smash that.
In the public sector, materials led the way in May, with $90 billion worth of planned deals. Financials rolled in next, chalking up $74 billion, and technology took third place, with $44 billion. But the private sector kicked the temperature up a notch, too, accounting for $81 billion worth of the total U.S. deal value in May.
So what’s driving this global M&A juggernaut?
Building Up By Buying Out: Web Giants Get Busy
One reason is that many companies believe it makes better long-term business sense to buy or merge with a competitor, rather than spending a ton of money in areas like R&D in an attempt to beat them. And in an already strong, globalized corporate environment driven largely by the Internet, now is the best time to do that.
Google is a good example. The company only went public in 2004 as a “search engine firm,” but hasn’t wasted any time breaking into new markets. It acquired web-video company YouTube in just a few days, helping establish it as more of a “media” firm than just a search engine.
It’s also trying to get the Federal Trade Commission into rubber-stamping its $3.1 billion deal to acquire web-advertising rival DoubleClick. But FTC has already launched an antitrust enquiry, with fears that if Google gobbles up a leading firm like DoubleClick, it will simply monopolize the $8 billion search advertising market and can charge what it wants to companies looking to target their ads.
Despite this concern, however, industry experts believe the Feds will eventually bless the move, albeit with Google perhaps forced to make some concessions over the amount of personal information it can collect and use.
And Microsoft’s recent $6 billion purchase (its largest buyout ever) of web advertising stalwart aQuantive, as well as Yahoo’s $680 million outlay to acquire RightMedia, shows that there are viable competitors. It also ups the ante between the big boys in this area, so look for a pretty interesting scrap to occur.
The Microsoft-aQuantive deal is huge and immediately propels Mr. Softie into the online marketing and advertising world with a vengeance. aQuantive profits surged 53% to $54 million last year, on revenues that spiked 43% to $442.2 million. Gates, Ballmer & Co. mean business here - and they’ve got the cash to succeed. After all, Microsoft offered $66.50 a share for aQuantive - a massive 85% premium over its share price at the time.
But it’s not just the web where things are heating up. The temperature is rising in the good ol’ fashioned newspaper industry, too…
Bancrofts Put Up The “For Sale” Sign
Media mogul Rupert Murdoch knows how to bat his eyelids in just the right way.
I flipped on my computer this morning and saw news that the Bancroft family, the controlling shareholder of the Dow Jones & Co. publishing company, has finally relented to Murdoch’s proposal and may now sell the firm. And after having an initial offer rebuffed, it puts Murdoch in pole position to toss $5 billion at them (at $60 a share, this is a 65% premium over the company’s pre-bid share price) and add yet another company to his News Corp. empire. This includes 20th Century Fox, FOX broadcasting network, Fox News Channel, the New York Post and the popular MySpace online friends network.
The main sticking point to a deal appears to be the Bancrofts’ fear that once Murdoch gets his paws on the firm, he’ll slice and dice it up into little pieces, damaging its independence and integrity. Murdoch says he’ll invest in the company and maintain its independence, but the union that represents The Wall Street Journal (which Dow Jones & Co. publishes) is against a Murdoch takeover, and the family will consider other offers - a situation that could spark a bidding war.
In response to the news, Dow Jones & Co. shares shot up around 15% today.
The potential Dow Jones-News Corp. deal is interesting, considering newspaper circulation rates and advertising revenues continue to dwindle. The industry recently reported another 2.1% readership decline over the past six months. That led to fellow publisher, the New York Times Company, reporting a 26% first-quarter earnings slump.
So you wanna know where the rest of the M&A action is?
Forget Gold And Silver… Look To Aluminum
We all know about how scorching demand is pushing up the price of gold, silver, copper and other metals. But here’s something you might not know: According to Bloomberg, this demand has triggered almost 500 deals or takeover bids within the metal industry.
And while it’s not the most glamorous metal, aluminum is charging forward with gusto. Prices have doubled over the past four years. And companies want to cash in. On May 7, Dow heavyweight Alcoa launched a hostile takeover bid for Canadian aluminum miner Alcan in a deal worth $27 billion (a 20% premium to Alcan’s all-time high on May 4). Alcan has rejected the offer, but if sealed, it would be the second-largest metal merger in history, following Mittal Steel’s $39 billion buyout of Arcelor SA last year.
Like Google’s bid for DoubleClick and Sirius Radio’s bid for fellow satellite radio company XM, this has set antitrust alarm bells ringing. But I’m not sure it’s warranted. Yes, the new company would boast twice the aluminum capacity of OAO Russian Aluminum. But considering that Russia and China already control over one-third of the global market for the metal, with Alcoa and Alcan both seeing their own market share erode in the process, they could use some competition.
But a deal is far from done. Apparently, Australian mining powerhouse Rio Tinto has hired an investment banker to size up a potential bid for Alcan itself. And rumors are swirling that Norsk Hydro ASA is about to submit a $30 billion bid for Alcan.
And then there’s the biggest buyout of the lot - and just like Braveheart, a classic Anglo-Scottish battle is underway…
British Bank Battle
Hot on the heels of a bid from fellow British bank, Barclays, a consortium led by the Royal Bank of Scotland (RBS), which includes Santander and Fortis, ponied up a massive $95.6 billion hostile offer for Dutch banking behemoth ABN Amro. That’s about 10% more than the Barclays offer.
The wrench in the works at the moment is ABN’s proposed $21 billion sale of its U.S. division, Chicago-based LaSalle Bank, to Bank of America - with part of the cash going to Barclays. Many saw this as a sneaky move on ABN’s part, given that RBS has a strong interest in LaSalle. In fact, RBS and LaSalle were close to a deal before RBS had to pull out to formalize its ABN takeover bid.
Enter the lawyers! A Dutch court froze the sale, saying ABN wrongly bypassed its shareholders by whizzing the deal through so fast, without approval. Bank of America then jumped into federal court and said the buyout is good to go under U.S. law. Now, the Netherlands Supreme Court is set to rule on an appeal against an order to freeze the LaSalle sale and whether ABN should have consulted its shareholders first.
And although the ABN board has blessed the Barclays deal, powerful ABN shareholders could yet scoot around that and call for a meeting to decide on the LaSalle sale and takeover proposal for themselves. So far, RBS negotiations with Bank of America to settle the issue one way or the other have gone nowhere.
Calling RBS “tall and deep” and Barclays “wide and thin” in terms of the two companies’ investment power, RBS chief Frank Goodwin believes his group has a “particularly comprehensive strategic fit in all of the main markets in which ABN Amro is operating.”
Regardless of whether RBS or Barclays prevails in this scrap, it would be the largest-ever banking takeover.
OK, let’s wrap this up…
A Quartet Of Potential Deals
According to Standard & Poor’s, the hottest sectors for merger and acquisition deals are media, finance, healthcare, energy, mining, manufacturing and transportation. Here are a few to watch:
- BMW & Volvo: With Cerberus Capital Management having bought DaimlerChrysler’s Chrysler division for $7.4 billion, the Financial Times and Sweden’s Goteborgs-Posten reported that BMW might buy Volvo. Since Ford owns Volvo, this could lift the struggling U.S. automaker, which lost a whopping $12.6 billion last year ($327 million of which came from its Premier Auto Group that includes Volvo). While a BMW executive said a deal is possible, Ford has scotched the rumor - although the two have done business in the past, with Ford buying BMW’s Land Rover division in 2000. But some are wondering why BMW would want any part of Ford’s business now when its brand is pretty stacked already and has sales growth issues of its own.
- Nasdaq Stock Exchange & London Stock Exchange: This one has been brewing for a while, with the Nasdaq’s hostile attempt to acquire the LSE. The NYSE and Australian group Macquarie have also filed bids, with the Nasdaq fighting a particularly interesting “Big Apple Battle” with its fellow stock exchange in the city.
- NYSE Group & Euronext: These two exchanges are already in talks to merge. But the Tokyo Stock Exchange might yet jump in, having expressed an interest in a NYSE-Euronext marriage. Hope it’s not a third wheel!
- US Airways, Delta & Northwest: Having withdrawn a $5.2 billion bid for Delta in January, will US Airways return to the well, now that Delta is trying to battle back from bankruptcy? Some have also touted Northwest as a potential bidder for Delta, and a consolidation of the sector’s weaker players would make sense.
What seems certain, however, is that the blistering hot M&A market will continue for the foreseeable future. Despite a weakening economy, the urge to merge has rarely been greater. Companies are cashing in on previous strength, a scorching stock market, and a truly global economy to make a deal. And it may be that investors are rushing into the market, in hopes of snagging the next takeover target. While it’s tough to predict exactly which companies will get bought out, this is nevertheless a very important trend to follow for the rest of the year.
Best regards,
Martin Denholm
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Today’s Smart Profits Action Center
- In the latest M&A news, Wachovia is acquiring A.G. Edwards for $35.80 a share - a 16% premium… Lehman Brothers and Tishman-Speyer Properties are finalizing a deal to buy apartment REIT firm Archstone-Smith for over $12 billion… and URS Corp. has agreed a $2.6 billion deal to buy Washington Group International.
- Another sector that might be ripe for a round of takeovers is real estate. The number of home sales slumped by the biggest amount in 17 years in 2006 - and the market isn’t getting much better. As homebuilding companies’ profits and share prices have fallen off the cliff, speculation is mounting that some firms may have to consolidate to recover market share, grow together to become a stronger player, or diversify into specialty markets like apartments/condos, retirement communities, or luxury homes.
- When you talk about expensive acquisitions, the region seeing the hottest activity is the American Southwest. And it’s pretty darn critical, too - as it concerns a commodity that is essential for everyone in the area. Since 1994, one company has specifically targeted the water industry here, gobbling up land and water rights to such an extent that it now owns 1.3 million acres in Nevada, Colorado and Arizona. And it’s about to sell them for 1,285 times the original purchase price. That will inject $408 million into its coffers - with another four major deals already in the pipeline. To discover how this opens up some explosive investment opportunities, read the special report here.
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