Fear of Losing Out Drives Deal Boom
With $2.15 trillion of M&A activity so far, this year is on pace to challenge 2007 record
For years after the financial crisis, fear kept corporate chiefs from striking merger-and-acquisition deals. Now it is prompting them to act.
Companies are merging at a pace unseen in nearly a decade. Halfway through the year, about $2.15 trillion in M&A deals or offers have been announced globally, according to Dealogic. That puts 2015 on pace to challenge the biggest year on record, 2007, when companies inked deals worth $4.3 trillion.
What is fueling the surge in part, bankers and lawyers say, is executives’ fear of being left behind rivals who strike deals to make them bigger and more efficient. In many cases, companies are concerned that if they don’t gain heft through acquisitions, they will become takeover prey themselves.
In industries ranging from health care to technology to media, chief executives are rushing to make acquisitions, often either in anticipation of takeover moves by rivals or in response to them. The resulting corporate realignments affect executives, employees, customers and suppliers.
The wave of activity began early last year, propelled by a cocktail of cheap debt, abundant cash on corporate balance sheets and rising stock prices. A relatively stable economy gave corporate executives confidence that the ground wouldn’t shift too much underneath them. When competitors began striking deals, the race was on.
Now, in many boardrooms, directors are strategizing about whether to make a takeover approach or how to respond to one.
“There’s increased competitive and strategic pressure to act,” says Gregg Lemkau, co-head of global M&A at Goldman Sachs Group Inc., the top bank adviser on takeovers so far this year, with more than $700 billion in deals to its credit.
Mr. Lemkau says there is a chance that 2015 will wind up being the biggest year ever for M&A, given other large deals in the works.
Certain industries have become hotbeds of M&A activity.
In the space of three months this spring, there were three major deals in the semiconductor industry.
In early March, NXP Semiconductors NV agreed to buy Freescale Semiconductor Ltd. for $11.8 billion. Next, Avago Technologies Ltd. struck a $37 billion deal to buy Broadcom Corp.—the largest pure-technology deal ever. Then Intel Corp. agreed to purchase Altera Corp. for $16.7 billion.
People involved in those deals say chip companies are trying to gain scale to better cope with rising semiconductor input costs—and to avoid being eclipsed by rivals who may become more competitive as a result of their own deal making.
More recently, there has been a flurry of merger talks in the health-insurance industry. The federal health-care overhaul had for years prompted predictions of consolidation in the sector.
Recently, Humana Inc. hung a for-sale sign. Then, in short order, UnitedHealth Group Inc. approached Aetna Inc., which then made a takeover proposal for Humana. Earlier this month, Anthem Inc. made a series of buyout offers for Cigna Corp., which itself is eyeing Humana. An acquisition of Humana could be announced as early as Monday, according to people familiar with the matter.
Such frenzies were rarely seen in the five years after the banking crisis in 2008 pitched the global economy into deep recession.
During that period, companies were largely focused inward. They sought to shore themselves up by slashing costs and directing much of their discretionary spending toward share buybacks and dividends, which are seen as a way of rewarding shareholders and are considered less risky than M&A.
The subsequent deal surge is good news for advisers, who are reaping considerable fees, and for many of the executives involved, who can gain either bigger jobs or lucrative “golden parachutes” upon departure.
But not everyone benefits. When mergers fail to live up to their promise, shareholders suffer. That proved true in Hewlett-Packard Co.’s ill-fated purchase of Autonomy Corp. in 2011, and in America Online Inc.’s 2000 agreement to combine with Time Warner Inc.
And because job cuts are a signature component of M&A, employees often suffer.
Through May of this year, there have been about 8,800 announced merger-related job cuts, which translates to an annual pace of about 21,000, according to Challenger, Gray & Christmas Inc., an outplacement-services and executive-coaching company. That is less than in the last takeover boom. In 2006, for example, there were nearly 77,000 such cuts, according to the company’s data.
John Challenger, the firm’s chief executive, says there have been fewer job cuts during this boom partly because companies had already shed so many employees during the recession. In many cases, he says, they are in need of skilled workers, especially in industries like technology and health care that are consolidating now.
“More and more, one of the biggest things that hampers growth is companies can’t get the skilled workers they need,” he says.
It isn’t clear how long the whirl of activity will last. There still are powerful forces restraining M&A activity, including troubles in the eurozone and antitrust concerns, which were in evidence recently when a judge issued a preliminary injunction blocking Sysco Corp.’s planned acquisition of US Foods Inc. on antitrust grounds.
Although overall economic growth remains sluggish, some M&A advisers say that is spurring deal making because it provides an extra incentive to find combinations that bring new sources of revenue and opportunities to enhance profit through expense cuts.
In April, XPO Logistics Inc. struck its largest deal ever when it agreed to buy French contract-logistics firm Norbert Dentressangle SA in a transaction valued at about $3.5 billion, including debt. Bradley Jacobs, XPO’s chief executive, says M&A has long been part of the company’s plan. While it is riskier than so-called organic growth, he says, it can have huge benefits if it is done right.
“In this industry, there are major advantages to scale,” he says. “You can take out costs and pass on the savings to customers. You can add billions to revenue overnight and condense a process that would otherwise take years.”
The last M&A boom involved many big leveraged buyouts, in which private-equity firms are the purchasers. This time around, private-equity firms have largely been squeezed out by corporate buyers, which tend to be able to pay more because they later can cut overlapping costs.
Three-quarters of U.S. deal volume this year has involved companies buying other companies, according to Dealogic. At the same point in 2007, 54% of the activity fit that description.
The stock market’s reaction to many deals is spurring deal makers. In 2013, the shares of a number of companies that made acquisitions rose on the news—the opposite of what often had happened.
When drug maker Endo International PLC agreed to buy Paladin Labs Inc. in November 2013, its stock rose 29% from the day before the deal was announced until a day after. And when cybersecurity firm FireEye Inc. agreed early last year to buy security-services firm Mandiant Corp., FireEye stock shot up 31% over a similar period.
Chief executives, who tend to watch their stocks like hawks, took note and stepped up their research on potential acquisition targets, bankers and lawyers say. Last year, many of those searches led to deals, which in turn begot others.
“Everyone who watched all those deals happening said, ‘Wow, for the right deal, the market will reward both target and acquirer,’” says Scott Barshay, head of the corporate department at Cravath Swaine & Moore LLP, a leading M&A law firm. Mr. Barshay, who has been a deal lawyer since 1991, says this is the busiest he has ever been.
In May, Ascena Retail Group Inc., the parent company of apparel retailer Dressbarn, signed its largest deal ever when it agreed to pay about $2 billion for Ann Taylor parent Ann Inc. Ascena’s stock rose following the deal.
“It’s an encouraging reaction, and it showed support from our investors and Wall Street,” says David Jaffe, chief executive of Ascena.
In 2013, the stock prices of U.S. acquiring companies rose 4%, on average, from the day before a deal was announced until the day after announcement, according to Dealogic. In 2014, they rose 3%, and so far this year, nearly 4%. Between 2008 and 2011, the average acquiring company’s stock dropped.
In February, financial-technology company SS&C Technologies Holdings Inc. agreed to buy rival Advent Software Inc. for about $2.4 billion, its largest deal ever, by far. SS&C Chairman and Chief Executive Bill Stone had first approached Advent 20 years ago. He did so again late last year, he says, and this time it led to a deal. SS&C shares rose 8% on the announcement.
“It’s been a long period of pulling your horns in,” Mr. Stone says, adding that until recently, “people didn’t let their animal spirits be released.”
Now, he says, “after so much time and so many buybacks and dividends, people start to say they need to strengthen their business and grow.”