By Dana Mattioli And Dana Cimilluca
The most active mergers-and-acquisitions market in years sped
into an even higher gear Monday, as companies took advantage of
rising stock prices to announce more than $100 billion in takeover
deals.
A pair of giant tie-ups pushed global M&A volume over the $3
trillion mark for the year, in a sign the corporate buying spree is
alive and well despite recent market volatility, tighter regulation
and the collapse of some large attempted combinations. In the
biggest deal announced this year, Actavis PLC agreed to buy
Botox-maker Allergan Inc. for $66 billion, while Halliburton Co.
sealed a $34.6 billion takeover of oil-services rival Baker Hughes
Inc.
At roughly $3.1 trillion, the current dollar volume of announced
deals and offers globally is higher than in any full year since
2007, according to data tracker Dealogic.
Deal makers point to a number of factors behind companies' yen
for mergers, including cheap credit and lofty stock prices--both
driven by easy-money policies from the Federal Reserve and other
global central banks grappling with sluggish economic growth.
The takeover surge is a boon to the investment banks and law
firms that advise companies on deals, often for fees that run into
the tens of millions of dollars.
Usually, a bank will charge a fee measured as a percentage of
the overall size of the deal, so the bigger the takeover, the
larger the fee.
In 2014, revenue from advising on M&A for banks globally has
hit $17.7 billion, according to Dealogic, up 14% over this time
last year.
Strong share prices give chief executives the confidence to make
bold acquisitions, especially when the deals are paid for at least
in part with the acquirer's shares, as is the case with both
Actavis and Halliburton.
Takeover deals are particularly attractive now because they can
lead to vast cost savings amid lackluster economic activity.
The two big tie-ups announced Monday are both expected to
generate in the neighborhood of $2 billion of such so-called
synergies.
"The CEO is saying right now: 'If I can acquire that company,
and I can use my stock to buy it, then that's a fair trade,' " said
Joseph Perella, a longtime Wall Street banker. "The seller is
saying, 'I can get a good price, and no tree grows to the sky
forever.' "
Mr. Perella, who co-founded merger-advisory boutique Perella
Weinberg Partners, predicts the current M&A boom will last at
least another six to 12 months. After that, a number of factors,
including the approach of the 2016 presidential election, make
predictions more challenging, he said.
The deal market is on a tear. Global takeover activity has
increased 32% over last year's total at this point, according to
Dealogic.
The M&A market took a long time to come back after the
financial crisis brought many companies' deal ambitions to a halt.
Even though several of the present financial ingredients have been
in place for a while--like a strong equity market and cheap
debt--it wasn't until this year that companies began taking
advantage of them in earnest.
One new development deal makers point to is the warm reception
many takeover announcements have received from investors, including
those owning shares in the acquirer, a group that traditionally
takes the most skeptical view of deals.
Once some companies started buying, others gained the confidence
to follow suit, or didn't want to miss out to a rival on a
potential target, advisers say. Another theme in the current boom
is that companies often are sticking with acquisitions that bolster
lines of business in which they are already strong rather than
venturing into new territory.
"Good deals beget more good deals," said Scott Barshay, head of
the corporate department at law firm Cravath, Swaine & Moore
LLP. "Companies are going after targets within their core
competencies, and when you add in the price of debt being as cheap
as it is, that helps tremendously in making a deal look smart," he
said.
Activist investors have also in many cases been a catalyst for
M&A, urging some companies to put up a "for sale" sign or
divest businesses. Pet supply retailer PetSmart Inc., for example,
is in the middle of an auction that was spurred by two activist
investors who disclosed large stakes and pushed for a sale.
In April, William Ackman of Pershing Square Capital Management
LP disclosed a 9.7% stake in Allergan. Pershing Square then teamed
up with Valeant Pharmaceuticals International Inc. in an attempted
takeover of Allergan. Their pursuit appears to have sputtered with
Allergan's agreement to be sold to Actavis.
To be sure, consolidation isn't good for everyone, and
shareholders aren't applauding all deals. Halliburton's stock, for
example, fell 11% Monday.
That came after the company announced a deal with antitrust
challenges that sported a premium of nearly 50% to the Baker Hughes
share price the day before The Wall Street Journal reported
talks.
Halliburton stock ended lower Monday than where it traded before
news of the deal broke Thursday.
Synergies are often derived primarily from job cuts. Baker
Hughes on Monday said in a securities filing that, "to achieve the
expected cost-saving synergies, we do expect some head count
reductions."
Bankers also caution that merger booms are fragile, and that
this one could come to a halt just as quickly as it started. A
number of investors fear, for example, that the stock market is
overvalued and due for a sharp drop after more than five years of
gains.
Such fears arose when financial markets swooned last month. The
worries were fed by the collapse of what was at the time the
biggest announced takeover of the year--drug maker AbbVie Inc.'s
$54 billion deal to buy Shire PLC.
The deal would have been a so-called inversion, a takeover that
allows a U.S. company to buy a foreign target and redomicile abroad
with a lower tax rate. AbbVie abandoned the agreement after the
Treasury Department disclosed rules designed to make such deals
less lucrative.
Inversions have been a big driver of deal activity, especially
in the health-care industry. Bankers fretted that, together with
the market volatility, the rule changes could take some air out of
the M&A market.
But with stocks coming back and deal making continuing unabated,
the outlook for M&A is as good as it was before, if not better,
they now say.
That is in part because, while deal making in the first half of
the year was largely dominated by two areas--health-care on the one
hand, and telecommunications, media and technology on the
other--more sectors have been heating up.
The oil-and-gas industry, for example, had been relatively calm
until August, when Kinder Morgan Inc. announced a $43 billion deal
to consolidate four pipelines.
The deal between Halliburton and Baker Hughes is the
fifth-largest U.S. energy deal since 1995.
Write to Dana Mattioli at dana.mattioli@wsj.com and Dana
Cimilluca at dana.cimilluca@wsj.com
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