If you’ve heard the sound of champagne corks popping in lower Manhattan in recent weeks, it may not have too much to do with this year’s holiday celebrations. Instead, investment bankers are most likely celebrating one of the most remarkable explosions in corporate deal-making in years.
Last week, for example, $93.8 billion in corporate mergers and acquisitions were announced in the United States alone — including Sprint's $35 billion acquisition of Nextel Communications — making it the busiest week for merger activity in nearly five years according to Dealogic, a financial data firm that tracks worldwide M&A activity. Including deals outside the United States, more than $100 billion in deals were announced last week.
In a further sign of improved corporate activity, the market for initial public offerings is sizzling, and 2004 is likely to be the best year for new stock issuance since 2000, with big-name companies like Google and Las Vegas Sands offering shares for the first time.
“I’ve never been busier than I am right now,” said Tom Taulli, co-founder of IPO-tracking firm Current Offerings and a professor of business at the University of Southern California. Taulli said he is involved as an advisor in six M&A deals of varying sizes, and is receiving daily offers for more work.
After a post-bubble slump earlier in the decade, corporate deal-making is making a strong comeback. So far this year some $863 billion worth of deals have been announced. That is up from from $554 billion in 2003, although far short of the $1.7 trillion of deals announced in the peak year of 2000.
The spate of deals is good news for Wall Street and investors, as it suggests growing confidence in company boardrooms and strong corporate balance sheets. But many investors are asking whether the deal binge is a temporary blip or whether it signals that merger mania is back on Wall Street.
There are a number of reasons why companies are acting swiftly to join the rush to merge. U.S. interest rates are widely expected to rise next year, which could dampen economic growth, and rising crude oil prices and the declining dollar still remain a threat to the outlook for corporate earnings growth.
Taulli, for one, expects the deal-making boom to continue into at least early next year.
“There is some momentum here and there are a lot of deals in the pipeline, so I think this deal binge can continue into at least the first half of 2005,” Taulli said. “We’ll see some more big deals hit the market soon, but more importantly, we will see a lot of smaller deals — that’s a healthy sign for the M&A market.”
Peter Cardillo, chief strategist at New York brokerage S.W. Bach, thinks the outlook for the economy is still good, although he expects slower growth in 2005. He also expects to see more foreign companies taking advantage of the weaker U.S. dollar to buy up American companies.
2004 got off to a strong start with a handful of high-profile unions, including Cingular’s purchase of AT&T Wireless and J.P. Morgan Chase’s $58 billion purchase of banking rival Bank One. But the deal pipeline ran dry by midyear, and it looked as though 2004 would be a mediocre one for investment bankers.
That outlook has changed in the past six weeks. The deal-making geyser has sprung back to life, with deals announced in a broad range of industries from software to financial services. In addition to Sprint's agreement to buy Nextel, Johnson & Johnson recently announced plans to buy medical device maker Guidant for $25 billion, and PeopleSoft agreed to a $10 billion takeover by Oracle after an 18-month battle.
The acceleration in deal-making can be attributed in great part to the closely fought U.S. presidential election, Taulli said. The uncertain outcome of the election led many company executives to hold back on mergers and acquisitions, while the victory of President Bush, a candidate seen as friendly to business, acted as a signal that “it’s safe to get back into the water," Taulli said.
Another reason for the growing appetite for M&A: Many companies are refocusing on growth after spending years putting in place the provisions needed for compliance with the Sarbanes-Oxley Act of 2002, which was introduced in response to a rash of corporate scandals.
A rise in the equity markets is also contributing to Wall Street’s return to focus on deal-making. Many companies are sitting on piles of cash and are looking for ways to use it.
“If you’re a public company, Wall Street wants to see growth, and many companies have spent years cutting costs and they’re finding that growth is harder to do organically,” said Taulli. “So if you have the cash and the market capitalization, why not buy?”
The outlook for merger activity looks solid, but the recent glut of activity is could drive up valuations, and potentially dampen executives’ appetites for deals.
A case in point is Sterling Commerce, a subsidiary of telecom giant SBC Communications, which this week announced plans to snap up e-commerce software maker Yantra for about $170 million in cash.
“CEOs are looking to acquire companies that can deliver, and so companies like Yantra are going to be very valuable,” said Jim Hendrickson, vice president of corporate development at Sterling. “So we actually moved up our timetable for acquisition so we could acquire a company like this now rather than later.”