Confident, cash-rich CEOs drive M&A to 4-year high

NEW YORK Mon Feb 14, 2011 6:30pm EST

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NEW YORK (Reuters) - Record amounts of cash and cheap financing have emboldened chief executives to sign off on deals aimed at boosting growth in a sluggish economy, helping push global dealmaking to a four-year high.

This week has kicked off with a series of merger announcements, including General Electric's (GE.N) $2.8 billion deal to buy John Wood Group's (WG.L) oil well support business and EchoStar's (SATS.O) $1.33 billion agreement to purchase of Hughes Communications HUGH.O. Private equity firm Clayton, Dubilier & Rice is also buying Emergency Medical Services EMS.N for about $3 billion.

The flurry of dealmaking has helped drive global M&A volume up 62 percent to $377 billion so far this year, according to Thomson Reuters data as of February 14. That's the highest since 2007, when the first ripples of the credit crisis were starting to squeeze financing for deals.

Stripping out spin-offs and restructurings, global takeover volume totaled $259.8 billion, up 12.4 percent from the same period a year ago.

"These are all multinational corporations that are looking around the globe to determine where their future growth is coming from," said Martha McGarry, a senior M&A partner at law firm Skadden, Arps, Slate, Meagher & Flom LLP.

"The pipeline looks very healthy, and the growth in deal volume looks appreciably different than 2010."

EXCHANGE MERGER, MEGA PHARMA DEAL

Companies built up huge cash hoards by cutting back on spending and dividends during the financial crisis.

Non-financial companies in the United States had $1.93 trillion in cash and other liquid assets at the end of September, up from $1.8 trillion at the end of June, according to Federal Reserve data released in December. Cash accounted for 7.4 percent of the companies' total assets, the most since 1959.

As the economic recovery gathers steam and confidence levels rise, corporate boardrooms have become more aggressive in using some of that cash to execute deals, bankers said.

Takeovers among financial exchanges are the latest sign of dealmaking hunger. The London Stock Exchange (LSE.L) last week bid $3.4 billion to acquire Canada's TMX Group Inc (X.TO).

And over the weekend, Deutsche Boerse (DB1Gn.DE) and NYSE Euronext NYX.N agreed in principle on the broad outlines of a merger and are expected to announce a deal this week, people familiar with the matter said.

French drugmaker Sanofi-Aventis (SASY.PA) is also expected to soon finalize a roughly $20 billion deal to buy U.S. biotech Genzyme Corp GENZ.O.

"A lot of these deals are a manifestation of what we saw through the back half of last year, which was a meaningful pickup in the level of strategic M&A discussions we are having with our clients," said Patrick Ramsey, co-head of Americas M&A at Bank of America Merrill Lynch.

"The level of engagement, time and focus spent by the companies that we work with as it relates to M&A continues to be high," Ramsey said, adding that the average size of deals under discussion is also getting larger.

Miner BHP Billiton's (BHP.AX) unsuccessful hostile $39 billion bid for Potash Corp (POT.TO) would have been last year's biggest takeover had it been consummated.

"When you jump from a greater number of larger deals to BHP/Potash, a mega deal which would have been the third largest cash deal in history, it is hard to predict how many of those there will be, but the environment remains generally conducive," Ramsey said.

"It is broad based and we expect to see a good deal of activity out of the healthcare, metals and mining, tech and general industrials sectors, and of course energy," he said.

STRATEGICS DOMINATE

Strategic buyers -- which operate in the same industry as target companies, as opposed to private equity firms -- have grabbed a big chunk of the deal pie, representing nearly 94 percent of takeovers so far this year.

Private equity activity has also increased, with deal volume rising 57 percent to $16.9 billion so far this year, according to Thomson Reuters data.

But a mega leveraged buyout in the range of $10 billion or more has proved elusive since the financial crisis and larger deals were stuck in the $4 billion to $5 billion range.

Drew Burch, head of healthcare M&A at Barclays Capital, said strategic demand had been particularly strong in his area.

"These companies have a lot of capital sitting on their balance sheets, considerable debt capacity as well as a need for globalization and diversification," he said.

"Healthcare is both recession-resistant and a beneficiary of a wealthier economy," Burch said. "Especially for the pharma companies facing patent expiries, they can either watch their business get smaller or take advantage of their strong cash positions to make strategic acquisitions," Burch said.

Skadden's McGarry added: "A seller is probably going to feel greater confidence in dealing with a strategic as long as they are paying cash, and they have relatively little need to, or risk of, financing the transaction."

The biggest private equity deals in 2010 were Kohlberg Kravis Roberts & Co's KKR.UL $5.3 billion purchase of Del Monte Foods Co DLM.N and the $4.6 billion acquisition by Canadian investors of British car parts maker Tomkins. Both transactions included debt.

(Editing by Steve Orlofsky)

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