Deals of the Year, in a Year of Deals

It was a record period for mergers and acquisitions—and 2007 could be even bigger

by Steve Rosenbush

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A near-perfect set of conditions is set to drive mergers and acquisitions to a global record in 2006, and dealmakers are optimistic that 2007 could be even stronger. Deal volume for the full year won't be available until 2007, but market researcher Dealogic says global volume could well exceed the record of $3.3 trillion set in 2000, the height of the tech bubble. It already has surpassed $3.7 trillion, and likely will top $3.8 trillion by Dec. 31. That would be a 28% gain over last year.

There was no lull for the holidays this year. On Dec. 18, shares of Harrah's Entertainment (HET) rose after news reports said private equity firms Apollo Management and Texas Pacific Group had bid $16.7 billion for the gaming company. Also on Monday, Apollo agreed to acquire real estate group Realogy (H), which includes Coldwell Banker, Sotheby's and other franchises, in a $9 billion deal. And Express Scripts (EXRX) launched a hostile, $26 billion bid for Caremark Rx (CMX), a pharmacy benefit management company that had agreed in November to merge with CVS Corp. (CVS). A few years ago, those deals would have ranked among the largest leveraged buyouts ever. Now, they're relatively routine transactions.

The deal wave drove investment-banking profits and bonuses to record levels. On Dec. 12, Goldman Sachs (GS) reported the biggest annual profit in the history of the securities industry, as it closed its 2006 financial year at the end of the third quarter. Goldman Chief Financial Officer David Viniar credits the $9.5 billion profit to a solid global economy, confident CEOs, consolidating global industries, and a stock market that has picked up steam since a summer slump. He says that, as the year draws to a close, "Conditions should remain strong in 2007," (see BusinessWeek.com, 12/13/06, "All That Glitters Is Goldman").

Another senior investment banker agrees that the strong M&A market could last through the coming year—and perhaps beyond. "Deal volume could exceed $4 trillion in 2007," says Boon Sim, head of M&A for the Americas at Credit Suisse. "We aren't in a bubble scenario, since valuation remains reasonable by historical standards and is significantly lower than in 1999 and 2000," he adds.

Here's a look at the trends that shaped 2006, and how they're likely to play out during the coming year:

Private Equity

There's no question that private equity was the dominant trend of the year. Fund raising by private buyout firms is expected to hit a record $225 billion this year, according to the Dow Jones Private Equity Analyst newsletter (see BusinessWeek.com, 11/7/06, "The Money Behind the Private Equity Boom"). Private equity giant The Blackstone Group announced that it was going to raise a record $15 billion fund—and then it boosted the target to $20 billion because of strong demand. Blackstone set a record in November for the largest buyout ever, with its $36 billion acquisition of Sam Zell's Equity Office Properties Trust.

Private equity deals are expected to surge deeper into record territory, even though their huge profits of the last two years might slow. Private equity funds, particularly big players such as Blackstone and Kohlberg, Kravis Roberts, have turned in profits of 50% or more. That can't continue, one industry executive says. But profits could easily remain in the 30% range.