M&A deal making on the rise

Merger and acquisition activity is on the rise. The Wall Street Journal reports, "After many months of staying away from the action, companies are now thinking about mergers and acquisitions at corporate strategy sessions and board meetings. Already several new deals have been announced and discussions

about other potential ones have intensified, say Wall Street deal makers." M&A action is not likely to reach the level of activity seen in the glory days of the 1990s, however, at least not anytime soon. M&A deals, at least for the foreseeable future, are likely to be more restrained and cautious in nature.

Over the past three years, deal making has not been a major focus of corporate activity. According to Thomson Financial, deals this year have barely totaled $190 billion, down 74 percent from a peak of $1.7 trillion in 2000. So far, the average deal in 2003 is just $50 million, one-third the average in 2000. One reason for the decrease is that corporations have been focusing internally, streamlining their operations and cutting costs. Amid corporate scandals and a faltering economy, many companies have delayed making purchases in order to concentrate on internal efficiency.

But now those same companies are looking outward again. "A lot of big and small public companies have stabilized and are now back on the market looking for revenue enhancements," claims Roland Van der Meer, a partner with venture capital firm ComVentures. Having trimmed their operations and decreased their workforces, many companies find themselves unable to grow quickly. According to Sean McDevitt, a managing director at Alterity Partners, a New York M&A advisory firm, these streamlined companies "cannot grow organically at rates Wall Street expects." In today's slow-growth market the only way for some firms to increase in revenue or gain market share is to acquire other companies.

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Another reason for increased deal activity is a rally on the stock market. Rising stock prices give buyers more purchasing power, since it takes fewer shares to buy a company in a stock deal. Lower interest rates are also making it easier for companies to fund acquisitions.

Economic growth and corporate efficiency also work for the sellers. Smaller and private companies are getting products into the market and building revenue. This makes them attractive targets, since buyers in today's economy want to see profits flow in quickly after deals are finalized.

The renewed interest in M&A may prove fragile, however. The rise in activity may simply represent demand that was temporarily put on hold by the recent war and the economy-threatening outbreak of severe acute respiratory syndrome. "Activity is definitely picking up, but it's just too early to say how sustainable it is," says Gary Kochman, head of mergers and acquisitions for the Americas at Credit Suisse First Boston.

Even if the current level of activity is sustained, we are not likely to return to the merger mania of the 1990s where large deals were executed quickly and frequently. In recent years, deal making has been limited and cautious. The number of deals may increase, but the caution is likely to remain. It's a buyer's market now, with the acquirers determined not to overpay. For example, when Berkshire Hathaway offered $1.7 billion for clayton Homes, Clayton responded by soliciting other bidders and asking Berkshire Hathaway to raise its bid. Berkshire Hathaway, uniterested in being drawn into a bidding war, refused to increase its offer and eventually completed the acquisition at its original price.

Buyers are also taking more time to execute deals. In the past, buyers would often take revenue projections at face value, but those days are gone. After seeing the technology and telecommunications bubbles burst, buyers these days are performing more in-depth evaluations to insure more realistic projections. Buyers are being more thorough with due diligence and are also taking time to gauge investor reaction to proposed deals. This not only means that it takes longer to complete a deal, it also means that fewer deal are brought to completion, as buyers are more likely to discover any potential disadvantages to the transaction.

The deals that are closing in today's market are fairly conservative. Not only are corporate buyers striving to spend less, they are also making fewer deals outside their own area of expertise. Buyers are looking for good matches to their current products and strategies, rather than using deals as a way to develop a new direction or radically transform their companies.

The increase in deal activity is an optimistic sign for the economy. Bank of America recently described an increase in M&A activities as a reason for "growing confidence in health and profitability." It is too early to say, however, if this level of activity will be sustained. In any case, deal making will remain cautious and conservative. Considering the long-term impact some of the rash mega-deals of the late 1990s and early 2000 have had on the economy, this may prove to be for the best.

Sources: Network World, US News and World Report, Wall Street Journal

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Purchase Price Ratios - Last 90 Days

Purchase Price Ratios - Last 90 Days

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By Andrew Dolbeck

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