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By Nadia Damouni
NEW YORK May 9 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
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
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
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
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
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
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)