By Soyoung Kim and Greg Roumeliotis
NEW YORK, June 30 Investor support for large
acquisitions and a desire to trump rivals in consolidating
markets have led chief executives to strike big transactions so
far in 2014, raising year-to-date global deal volumes to their
highest level in seven years.
Corporate buyers did not shy away from going hostile if
their targets proved unwilling to sell, while more U.S.
companies rushed to buy overseas peers to lower tax rates and
access cash held offshore in a practice known as inversion.
The dealmaking frenzy could last for several months absent
geopolitical or economic shocks, with buyers keen to take
advantage of their strong stock prices, ample cash reserves and
cheap available financing.
"Companies have strategic imperatives to do deals, they have
the cash to do deals, and they can borrow additional cash at
record-low rates," said Frank Aquila, a mergers and acquisitions
lawyer at Sullivan & Cromwell LLP. "It really is a bit of a
perfect storm when it comes to dealmaking."
Unlike the most recent heyday of dealmaking, which was back
in 2007 when private equity used cheap money to load up
companies with debt, this year's merger boom is being led by
cash-rich corporations with strong balance sheets, such as
Pfizer Inc, Comcast Corp and General Electric
"What is notable about the deal activity we have seen in the
first half of the year is the blue-chip nature of the companies
who are doing the acquiring. We have finally seen the return of
the strategic acquirer," said Gregg Lemkau, co-head of global
mergers and acquisitions at Goldman Sachs Group.
Year-to-date global deal volume as of June 26 surged to
$1.75 trillion, up 75 percent from the year-ago period,
according to Thomson Reuters data. That was the highest level
since 2007, when deal volume reached $2.28 trillion. (Graphic link.reuters.com/gur32w)
This year's increase came despite the number of global deals
dropping slightly to 17,698 from 17,820 the year before.
At over $1 trillion, the second quarter of 2014 was the
highest in deal volume since the second quarter of 2007 and was
up significantly from the $680 million in the first quarter of
Thirty-eight unsolicited or hostile bids, worth more than
$150 billion, were launched in the first six months of the year,
compared with 19 such deals worth $8 billion in the same period
Pfizer made an abortive $118 billion bid for AstraZeneca Plc
, Valeant Pharmaceuticals International
Inc is trying to buy Botox maker Allergan Inc
for more than $50 billion, and AbbVie Inc
plans to appeal to Shire Plc's shareholders
after an unsolicited $46 billion bid was rebuffed.
"With both the target and acquirer's stock generally up
after deals are announced, buyers see value creation and tend to
be more aggressive even if targets are not willing to sell,"
said Ravi Sinha, executive vice chairman of global corporate and
investment banking at Bank of America Merrill Lynch.
More CEOs and boards are willing to pull the trigger on
transactions that have been contemplated for a while, with a
view that financing conditions are at their peak and unlikely to
improve, said Marc-Anthony Hourihan, co-head of Americas M&A at
Risk-taking has been generally rewarded by investors, at a
time when low cost of capital means buyers can obtain immediate
boosts to their earnings from those deals.
Nearly 70 percent of announcements of U.S. acquisitions
worth $1 billion or more in the first half were followed by
gains in the stock prices of the buyers, up from 60 percent in
the same period last year and compared with a seven-year average
of 55 percent, Thomson Reuters data showed.
"In the early stages of an M&A wave, the returns to
acquirers tend to be positive, but as the M&A wave matures, the
returns turn negative as people get overconfident," said Bob
Bruner, dean of the University of Virginia's Darden Graduate
School of Business Administration and author of the book "Deals
"It would seem that we are still at the early stage of the
wave," he said.
With stock markets at record-high levels, the average
premium buyers paid over target companies' four-week stock
prices was 24.8 percent so far this year, down from 28.1 percent
in the same period last year and 30.3 percent in 2012.
But on an earnings before interest, tax, depreciation and
amortization (EBITDA) basis, valuations climbed.
Buyers on average paid targets 13 times EBITDA in the first
half of the year, compared with 11.8 times in the same period
last year. That was the highest level since 2008, according to
Thomson Reuters data.
"On an (earnings per share) accretion basis, nearly every
deal looks great. However, on a return-on-invested-capital
basis, values appear pretty high," Goldman Sachs' Lemkau said.
"Many boards are being forced to think about whether their
traditional return on invested capital thresholds remain
appropriate in an environment where the cost of capital is so
low," he added.
The red-hot equity markets and rising deal valuations also
forced buyout firms to the sidelines, with private equity-backed
leveraged buyouts declining 9 percent to $120.3 billion so far
this year, representing 7 percent of the M&A market. Private
equity firms, however, took advantage of the M&A boom to sell
more of their companies for top-dollar amounts.
"It's a great debt market but the issue for private equity
is that it has inability to do highly levered transactions,
compared to the leverage levels in 2006 and 2007, given the
federal limitations," UBS's Hourihan said.
Goldman Sachs was the top M&A adviser worldwide, with $623
billion worth of deals so far this year. Morgan Stanley,
Bank of America Merrill Lynch, Citigroup Inc and
JPMorgan Chase & Co rounded out the top five.
Inversions by U.S. companies, which allow them to be
domiciled in countries that have a lower corporate tax rate,
have moved center-stage in the healthcare sector, which was the
busiest industry for dealmaking this year.
Such transactions also helped boost cross-border M&A volume,
which surged 132 percent so far this year to account for 39
percent of global activity.
U.S. medical device maker Medtronic Inc struck a
$42.9 billion deal for Ireland-based rival Covidien Plc
in June, in one of the largest attempted inversions.
Pfizer's bid for AstraZeneca, as well as AbbVie's takeover
offer for Shire, would also enable these companies to cut their
tax bills by moving to a country with a lower corporate tax rate
while also allowing them to access the cash held offshore
without paying U.S. taxes.
Even excluding Pfizer's AstraZeneca bid which has been put
on hold for now, healthcare deals more than tripled to $317.4
billion so far this year, representing 18.2 percent of total
deal volume, Thomson Reuters data shows.
Some companies that are still without a foreign domicile are
now trying to catch up with rivals that have already gone
offshore and taken advantage of their more favorable tax status
to strike even more deals.
"I think you will continue to see inversion transactions
being contemplated. This is particularly relevant to the
Healthcare and TMT sectors, where you have a lot of cash trapped
offshore," Goldman's Lemkau said.
Gary Posternack, head of Americas mergers and acquisitions
at Barclays Plc, added that while there are a large
number of U.S. companies interested in exploring inversions,
finding the right partner at the right valuation can be a
"The limiting factor for inversions will likely be the
ability of U.S. companies to find attractive and willing
partners," he said.
The second-busiest sector for dealmaking this year was media
and entertainment, which had deal volumes nearly triple to
$220.7 billion on the back of two mega-mergers: Comcast Corp's
$45.2 billion bid for rival Time Warner Cable and AT&T Inc's
proposed acquisition of DirecTV for $48.5 billion.
The broader telecom sector is likely to get another boost in
the near future as Sprint Corp and T-Mobile US Inc
are in advanced talks about a deal that would combine
the third- and fourth-largest U.S. wireless operators.
"The tone in the boardroom has changed from one that was
doubtful about strategic M&A activity to one that is questioning
the status quo," Posternack said.
"With all of the recent deal activity and the positive
associated market reaction, the question now being asked is why
are we not acting on the logical transactions?"
(Editing by Matthew Lewis)