Bloomberg News

Global Takeovers Drop in Quarter as Bankers See Revival

March 29, 2012

An aerial view shows the Super Pit and mining operations at Xstrata's Mt. Isa mine. Glencore's $45 billion deal for Xstrata was the only announced purchase in the quarter that topped $8 billion. Photographer: Jack Atley/Bloomberg

An aerial view shows the Super Pit and mining operations at Xstrata's Mt. Isa mine. Glencore's $45 billion deal for Xstrata was the only announced purchase in the quarter that topped $8 billion. Photographer: Jack Atley/Bloomberg

Global dealmaking slumped for a third straight quarter as chief executive officers funneled cash into share buybacks and new products, a trend that may reverse in the coming months as the economic recovery gains momentum.

Mergers and acquisitions so far this quarter fell 14 percent from the fourth quarter to $418 billion, making it the slowest three-month period in 2 1/2 years, according to data compiled by Bloomberg. Glencore International Plc’s (GLEN) $45 billion deal for Xstrata Plc (XTA) was the only announced purchase in the quarter that topped $8 billion.

Most CEOs are only now beginning to consider deals, said investment bankers at Goldman Sachs Group Inc. (GS:US) and Citigroup Inc. (C:US), predicting renewed confidence in the U.S. and Europe will spur a pickup. Since deal negotiations often take three months or more, the first quarter is mainly a reflection of a temporary slowdown that began last year as global stock markets hit a one- year low, bankers said.

“I still think big cash surpluses will lead to more M&A because companies fundamentally want to grow,” said Peter Tague, who started as co-head of global M&A at Citigroup in New York in this month. “If we find ourselves in June having these same low activity levels, I’d be really surprised.”

More Takeovers

The U.S. and Asia led the dip in deals in the first quarter, while transactions involving European targets were boosted by Glencore’s Xstrata takeover and United Parcel Service Inc. (UPS:US)’s $6.8 billion agreement to buy TNT Express NV.

In one sign of a possible comeback, Pentair Inc. (PNR:US) yesterday agreed to buy the flow-control unit created by Tyco International Ltd. (TYC:US)’s breakup for $4.53 billion in stock, spurring speculation that Tyco’s remaining businesses will also be sold. Drugmaker Roche Holding AG (ROG) is going after Illumina Inc. (ILMN:US), raising its hostile offer today by 15 percent to about $6.7 billion, and Bristol-Myers Squibb Co. (BMY:US) approached Amylin Pharmaceuticals Inc. (AMLN:US) with a $3.5 billion unsolicited bid this year, people with knowledge of the matter said this week.

“Sellers recognize the buyer universe has gotten hungrier, and the lending markets remain very supportive of dealmaking,” said Chris Ventresca, co-head of Americas M&A at JPMorgan Chase & Co. (JPM:US) in New York. Until February of this year, companies “had more reasons to focus inwardly, strengthening their balance sheets or implementing share buyback or dividend programs than to look externally for deals.”

Assets for Sale

Even after making investments and paying dividends, the top 1,000 non-financial companies worldwide are still sitting on about $3.5 trillion in cash, according to Bloomberg data. Apple Inc., AstraZeneca Plc and JPMorgan Chase & Co. announced plans this quarter to repurchase almost $30 billion in stock, and the biggest companies have boosted research and development spending more than 20 percent in the past two years to about $618 billion, the data show.

Companies including United Technologies Corp. and Pfizer Inc. (PFE:US) are also putting assets on the block. Pfizer may fetch at least $10 billion for its infant-nutrition unit, with Nestle SA and Danone vying for the business, people with knowledge of the matter said in February. United Technologies said this month it plans to use about $3 billion of divestitures to help pay for its $16.5 billion acquisition of Goodrich Corp. DuPont Co. is exploring the sale of its auto-paint division, people have said.

‘Healthy Increase’

“We are seeing a healthy increase in the number of sell- side pitches and mandates in the last few weeks,” said Jacques Brand, global co-head of investment banking at Deutsche Bank AG. “As the markets stabilize, corporates are identifying and readying non-core assets that can be sold to a strategic or a private-equity fund.”

An improved financing market is fueling interest, Brand said. The extra yield investors demand to hold company bonds worldwide rather than government debt has declined to 2.68 percentage points as of March 27 from 3.51 percentage points at year-end, according to the Bank of America Merrill Lynch Global Broad Market Corporate & High Yield Index.

Executives are gradually getting more comfortable with a return to dealmaking, which will probably accelerate in the second quarter as confidence returns, said Gregg Lemkau, head of M&A for Europe, the Middle East, Africa and Asia-Pacific at Goldman Sachs in London.

Cash Injection

“In the second half of last year, there were three areas of potential economic concerns for clients: Europe, the U.S. and China,” he said. “The level of anxiety around all three has come down significantly now, which is helping to increase risk appetite and improve confidence.”

Without Glencore-Xstrata, European takeovers would have fallen 12 percent in the first quarter from the previous three months to $46.6 billion. To prop up the region, the European Central Bank has injected more than 1 trillion euros ($1.3 trillion) into the region’s banking system since December.

“Monetary policy has had a positive impact on the financing markets, but concerns remain as to the status of the real economy in a number of countries,” said Giuseppe Monarchi, co-head of the Europe, Middle East and Africa for Credit Suisse Group AG in London.

The region’s turmoil has turned some assets into targets for overseas buyers. ING Groep NV (INGA) is seeking at least $7 billion for its Asian insurance business as the Dutch company is under European Union orders to divest its entire insurance operations before the end of 2013 as a condition for approval of state aid.

Asia M&A

Both U.S. and Asian buyers, whose economies are in better shape than those in Europe, are looking at acquisitions outside their home region, said Hermann Prelle, chairman of mergers & acquisitions in Europe, the Middle East and Africa at UBS AG.

Cisco Systems Inc. (CSCO:US), with $46.7 billion in cash as of January, said this month it will finance a $5 billion purchase of U.K. video-services software company NDS Group Ltd. with funds held overseas.

In Asia, there an increasing amount of dealmaking in financial services with multinational firms “rationalizing and pulling back selectively in the region,” said Joseph Gallagher, co-head of Asia-Pacific M&A at Credit Suisse Group in Hong Kong. He also anticipates oil and gas transactions will lead Asian M&A as countries including China seek more resources to fuel expanding economies.

Adviser Rankings

First-quarter Asia-Pacific deals dropped 38 percent from the previous three months to about $40 billion, data show.

“We are hopeful that the rest of the year will see increased levels of activity,” said Samuel Kim, head of M&A for Asia-Pacific at Morgan Stanley. “We’re seeing a lot of clients think actively about M&A.”

More Asian companies are also pursuing corporate takeovers, rather than focusing just on buying assets or forming joint ventures, Kim said. Youku Inc. (YOKU:US), owner of China’s most popular video website, agreed to buy smaller competitor Tudou Holdings Ltd. in a $1 billion stock deal this month in one example of this trend.

Morgan Stanley is the top adviser for Asia so far this year, data compiled by Bloomberg show. Globally, JPMorgan is the top financial adviser among investment banks so far this year, followed by Citigroup and Goldman Sachs.

To contact the reporters on this story: Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Matthew Campbell in London at mcampbell39@bloomberg.net; Cathy Chan in Hong Kong at kchan14@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net


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