(FROM THE WALL STREET JOURNAL 4/9/15)
By Dana Cimilluca, Dana Mattioli and Shayndi Raice
Takeovers are booming as companies gain more confidence about
the economy, use stockpiles of cash to reach for future growth and
get boosts from low interest rates and the surging stock
market.
Wednesday's bid by Mylan NV of $28.9 billion for rival drug
maker Perrigo Co. increased the combined value of all takeovers
announced in 2015 to more than $1 trillion, according to researcher
Dealogic. The total also includes Royal Dutch Shell PLC's deal,
first reported Tuesday by The Wall Street Journal, to buy BG Group
PLC for about $70 billion, creating the world's largest independent
producer of liquefied natural gas.
At the current pace, mergers-and-acquisitions volume for the
full year would exceed $3.7 trillion, making it the second-biggest
year in history after 2007. Among the deals proposed or announced
so far this year, 15 are valued at more than $10 billion, the
highest such number on record, says Dealogic.
The two latest megadeals underscore the forces behind the
M&A surge. Seven years after the financial crisis hit, the
aftereffects on companies and markets have largely faded,
bolstering the boardroom confidence that is a crucial ingredient
for deal-making.
At the same time, rock-bottom interest rates make it cheap for
companies to borrow money for takeovers, while the strong stock
market gives acquirers' shares more buying power. Executives and
directors know those conditions won't last forever, making some
companies even more eager to do deals now.
And after a decade of productivity gains and cash hoarding, many
companies are in search of new earnings sources. Mergers and
acquisitions of rivals can deliver that through margin improvement
and growth opportunities, says Blair Effron, co-founder of
Centerview Partners LLC.
The deal-advisory firm has worked on some of this year's biggest
mergers, including the combination of Kraft Foods Group Inc. and
H.J. Heinz Co., valued at more than $50 billion.
"Executives in all sectors are saying: 'We have a good stock
price, a good financing market and our business is well in hand.
It's time to think about something more expansive, like M&A,'"
Mr. Effron says.
Spice maker McCormick & Co. has made two small acquisitions
so far this year after a stretch of inactivity. When asked about
M&A on an earnings call two weeks ago, Chief Executive Alan
Wilson said: "It's an optimum time." The company is looking for
additional deal-making opportunities, he indicated.
To be sure, deal making is still running behind the pace of
2007, when companies struck $4.3 trillion worth of combinations.
Helping to boost the numbers then, private-equity firms made
acquisitions at an unprecedented clip.
Such activity is lower now partly because some of those deals
fell short of expectations. The current M&A wave is centered
around traditional company-to-company mergers.
Deal volume as measured by number of transactions remains
sluggish. A total of 9,932 mergers has been agreed to so far this
year, compared with 10,861 in the same period in 2014.
Europe is holding back some corners of the deal market. Beset by
concerns over the health of some of its weaker countries, deal
activity in Europe is lagging despite the boost from the BG deal
announced Wednesday.
At the height of the M&A boom in 2007, activity was busier
in Europe than the Americas. Before the overall market can reach
those heights again, Europe likely needs to stage a stronger
rebound.
In one encouraging sign for activity in the region, a number of
deal makers say strength in the dollar is encouraging U.S.
companies to consider acquiring abroad. That was a factor behind
FedEx Corp.'s agreement this week to buy Dutch package-delivery
company TNT Express NV for $4.8 billion.
FedEx said when the deal was announced that it began negotiating
with TNT six weeks earlier, when the euro was falling toward
10-year lows against the dollar.
In an interview Wednesday, Scott Wine, chief executive of
vehicle maker Polaris Industries Inc., said: "The strength of the
dollar doesn't always help in selling our products, but it does
help when we're looking to do acquisitions, especially outside of
the U.S."
The BG deal is an indication that big takeovers are still doable
in Europe. It's also a sign that the energy industry, traditionally
one of the top contributors to M&A activity, is beginning to
pull its weight again.
The steep decline in oil prices has encouraged companies in the
industry to seek tie-ups that can help them weather the volatility.
Sharp stock-price declines have also made target companies more
affordable.
BG shares had fallen 30% since spring before the deal
announcement. Shell is paying a 50% premium to BG's closing share
price Tuesday.
At $107 billion, announced oil-and-gas deal volume is off to the
strongest start to a year since Dealogic started tracking the data
in 1995. The Shell-BG tie-up propels oil and gas to the
second-most-active sector after health care.
Megadeals like Shell-BG often yield total adviser fees well
north of $100 million. The merger wave has been a welcome
development for Wall Street, generating higher fees at a time when
other revenue sources, like bond trading, are under pressure.
Skeptics caution that many mergers fail to live up to their
billing, as promised cost-cutting and other benefits often fail to
materialize. Meshing companies with disparate cultures, technology
and other systems can be harder than expected. And takeovers
frequently are accompanied by job cuts, meaning that even if
investors win, some employees lose.
There is no guarantee that all the announced deals will be
completed. Deals can be torpedoed by numerous causes, including
antitrust scrutiny. Perrigo hasn't agreed to the unsolicited $28.9
billion offer from Mylan. Still, Mylan shares rose 15% on
Wednesday, while Perrigo jumped 18%.
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