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Corporate deals are back, but buyers are choosy


Corporate America is back shopping for deals again, but buyers are being very picky.

Thanks to a rising stock market, record low interest rates and piles of cash hoarded during the recession and weak recovery, American companies are kicking off 2013 with a flurry of deals.

But don’t expect another round of high-flying Wall Street wheeling and dealing. With the overall economy still sluggish, choosy corporate executives are looking for smart buys that will boost profits for their existing operations.

And they've started off 2013 with a bang.

A week ago, Dell Computer founder, Michael Dell, announced that he’d partnered with other investors to buy his company back from shareholders for $24 billion. Liberty Global, a company controlled by the billionaire media magnate John Malone, agreed to pay $16 billion British cable giant Virgin Media.

This week, Comcast said it will pay $16.7 billion to buy the rest of NBCUniversal, the publisher of this web site, that it did not already own. And American Airlines and US Airways agreed late Wednesday to merge in a deal valued at $11 billion.

So far this year, corporate buyers have announced some $158.7 billion worth of mergers and acquisitions, according to Thomson Reuters data, more than double the pace by this time last year. Six deals worth more than $20 billion have been announced since mid-October. Before that, there had been only 14 such mega-deals following the finance collapse of September 2008, according to S&P Capital IQ.

One of those was announced Thursday by Berkshire Hathaway, the conglomerate run by Warren Buffett, who partnered with Brazilian investors to buy ketchup maker H. J. Heinz for about $23 billion.

With some $47 billion in cash burning a hole in the company’s pocket, Buffett says he’s not finished shopping.

“If you see another elephant walking by, give me a call,” he told CNBC Thursday.

Buffett isn’t the only CEO with plenty to spend. After more than four years of hoarding profits, the biggest companies in the Standard and Poor’s 500 index are sitting on more than $1 trillion in cash.

If you don’t want to pay cash, acquisitions and mergers are getting easier to finance. Though banks are still much choosier about lending money than they were before the financial collapse, they’ve repaired much of the damage from the massive losses from the mortgage bust.

And with the Federal Reserve holding interest rates at record lows, companies financing their deals with debt are borrowing some of the cheapest money available in decades.

Related story: Merger activity back, but not likely to heat up market

The shopping spree breaks a long dry spell for Wall Street deal makers. After the bottom dropped out of the financial markets in 2008, and the economy spent the next four years struggling to recover, most corporate CEOs hunkered down by trimming payrolls, cutting costs and saving up cash to weather the storm.

But there’s only so much profit growth you can squeeze from existing operations, said investor and long-time deal-maker Nelson Peltz.

“Revenue growth is hard to come by,” he said. “I think most of corporate American feels they have skinnied down their operations to a point whether they can’t get much more out of it. So synergies are the next way of getting (earnings) growth.”

The new wave of deals doesn’t change the outlook for job growth or the economy, which most forecasters expect to remain locked in a slow-but-steady growth pace for at least the next year. In some cases, corporate mergers and acquisitions could bring new hiring if the combined companies can grow by steal business away from competitors. Mergers of companies with similar operations, on the other hand, often spark layoffs in departments that overlap.

But while corporate managers may be stuck with slower growth than they’d like, they’re more confident that the worst of the downturn is behind them.

“Sentiment is getting better; it’s not the same doom and gloom you’ve had over the last three or four years,” said William Nichols, co-head of U.S. equity trading at Cantor Fitzgerald. “You don’t get the same sense that it’s the end of the world.”

The recent election has also eliminated a major wild card that tabled investment decisions last year and put potential corporate deals on hold.

“Now, it’s set. This is the way it’s going to be. This is what it is,” said Jimmy Dunne, head of Sandler O’Neill, an investment banking firm that specializes in the financial service industry. “I don’t understand the uncertainty. We’re going to have more of the same. So just deal with it accordingly.”

That sentiment is also propelling stock prices higher which, in turn, is helping fuel the new wave of deals. Target companies are more inclined to sell, now that their stock prices have returned close to pre-2008 levels. And buyers worry that if they don’t make a deal now, they’ll end up just paying more later.

Despite the new-found confidence and easy financing, the shopping spree doesn’t yet look like the go-go 1980s leveraged buyout boom or the deal frenzy that accompanied the late-1990s stock market bubble. For now, the memories of the financial bubble of the late 2000s, is still too fresh in buyers’ minds.

“I think you’re going to see companies stay more focused and they’re not going to be willing to venture outside their core expertise as much as they have in prior era,” said Harvard Business School professor and former Goldman Sachs vice chairman Robert Kaplan. “So that will put more of a focus on these mergers – a little more discipline.”