DEALTALK-In M&A frenzy, deals that show CEO confidence is returning

Fri May 9, 2014 7:00am EDT

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By Nadia Damouni

NEW YORK May 9 (Reuters) - Over the past few years conditions have been ideal for dealmaking. Financing has been cheap, thanks to record low interest rates. Balance sheets have been strong, as companies hunkered down in the aftermath of the 2008-2009 financial crisis. The U.S. economy has come out of recession, but growth is still slow.

So every year, bankers have been predicting the return of corporate M&A in a big way. It has not really happened, though, because an essential ingredient in large, transformative transactions has been missing: CEO confidence. That's no longer a problem, say bankers and executives who see merger mania gripping corporate America again after a six-year hiatus.

Among the deals in the busiest year for M&A since 2007 are many that show management teams and boards are becoming more confident to take on risks that a large deal entails. That suggests the recent rash of dealmaking is likely more than a coincidence or a sector-specific phenomenon.

"Big deals require CEO and board confidence," said Gregg Lemkau, Goldman Sachs Group Inc's co-head of global M&A. "We have all been waiting for the past few years for that confidence to return."

"The dialogue we are having at the CEO level more than we have had in any time since pre-2007 is, 'What is your dream deal?', because the environment now is very conducive to think about doing your dream deal," Lemkau said.

Perhaps the clearest signs of returning confidence are deals such as Zimmer Holdings Inc's $13.35 billion purchase of rival Biomet Inc; Pfizer Inc's $106 billion bid for AstraZeneca Plc ; and General Electric Co's $16.9 billion bid for Alstom SA's energy business.

Sources familiar with the situation said Zimmer had long considered buying Biomet, attracted by the opportunity to increase scale and add to its research and development capabilities. The acquisition would make it the No. 2 seller of orthopedics products.

It was able to pull the trigger because, "if you are a CEO, the market feels better and you have terrific financing," one of the sources said. Biomet's plans to go public added to the sense of urgency, and the deal came together in just three weeks, the sources said.

Zimmer declined to comment.

Two years ago, Pfizer CEO Ian Read said he had no interest in a massive consolidating deal and would stick to smaller bolt-on deals, though he added, "Never say never."

By the start of 2013, that tone had changed and Read said the company would even look at larger opportunities if they would add value for Pfizer shareholders.

GE CEO Jeffrey Immelt similarly had said he was only looking at transactions in the $1 billion to $4 billion range. But on the company's first-quarter conference call in April, Immelt suggested that GE would be willing to strike deals above that threshold.

'UNPRECEDENTED TIMES'

These deals stand out from other large deals in recent months that have been driven either by a set of unique circumstances or founders trying to build their legacies.

Facebook Inc's Mark Zuckerberg, for example, need not fear for his job even if his $19 billion purchase of fast-growing messaging startup WhatsApp turns out to be a mistake. He controls the social media platform that he built from scratch.

Comcast Corp Chief Executive Brian Roberts was not looking to do a large deal, sources have said. But then Time Warner Cable Inc became available, thanks to Charter Communications Inc's efforts, and it made sense.

Drugmaker Forest Laboratories Inc Chief Executive Brent Saunders, who recently agreed to sell his company to Actavis Plc for about $25 billion, said boards are realizing that "as a strategy you can't say, 'We are going to hunker down and continue to add to our balance sheet forever.'"

"At some point you want to say, these are unprecedented times, and if there are assets out there - and we think we are better owners, and operators and managers - then we should be looking at those things," Saunders said.

That suggests the dealmaking frenzy could continue in the coming months. Deals worth nearly $1.3 trillion have been struck so far this year globally, up 91 percent over the same period last year, according to Thomson Reuters data.

Of that, large deals - those over $5 billion including debt - totaled $635.1 billion, more than triple the activity seen over the same period last year. They have increased in number as well, with 39 announced so far this year, up from 10 over the same period last year.

CONFIDENCE IS FRAGILE

The increasing confidence is showing up in surveys of corporate chieftains. The Conference Board and PwC Measure of CEO Confidence hit 63 in the first quarter of 2014, up from 60 in the previous quarter and a two-year high. A reading of more than 50 points reflects more positive than negative responses.

Similarly, a TD Bank survey of chief financial officers released on Thursday shows nearly 60 percent of respondents are optimistic about U.S. economic growth this year, up from 46 percent last year.

But while the TD survey shows confidence is returning, concerns linger about regulation, global volatility and political gridlock in Washington over the budget deficit and taxes.

Bankers said a rise in protectionism also could become a threat for large cross-border M&A.

"This is a long-overdue bounceback of the M&A market," said Robert Eatroff, Morgan Stanley's co-head of M&A in the Americas. But he added, "Confidence is a fragile thing. A big geopolitical shock to the system and the level of activity could decelerate quickly."

Private equity, a major driver for deals, is sitting more on the sidelines after a run-up in stock prices over the past year. Buyouts totaled $62 billion so far this year, down 35 percent compared to 2013.

But the corporate M&A cycle might be beneficial for private equity, as it could lead to more corporate carve-outs and divestitures, said Joseph Baratta, Blackstone Group LP's global head of private equity. (Additional reporting by Olivia Oran, Soyoung Kim and Greg Roumeliotis, Editing by Paritosh Bansal and Douglas Royalty)