Mergers, acquisitions show that the recession is over
Whether or not you’re personally convinced that the recession is just about over, those in the big buck mergers-and-acquisitions game are believers.
Biotechnology stocks, for example, have made dramatic gains because investors consider them ripe for picking. Big drug companies want innovative products in place for an economic revival.
Bristol-Myers Squibb recently bought biotech group Medarex Inc. for $15 a share, or $2.4 billion, about a 100 percent premium for Medarex shareholders.
"There are all these biotechnology companies out there that have been dying throughout the recession and unable to get capital or funding," observed Richard Bove, banking analyst with Rochdale Securities of Stamford, Conn.
Other deals include Walt Disney Co. buying Marvel Entertainment Inc., PepsiCo Inc.’s purchase of Pepsi Bottling Group Inc. and, in energy, Baker Hughes Inc. acquiring BJ Services Co.
In pharmaceuticals, there’s been the Pfizer Inc. deal for Wyeth and Merck & Co. acquisition of Schering-Plough. In technology, there’s the Adobe Systems Inc. deal for Omniture Inc. and Oracle Corp. purchase of Sun Microsystems Inc. In candy, Cadbury Plc has been in play since Kraft Inc.’s hostile bid.
"It’s all a sign you can’t keep a good capitalist down, and eventually greed will overcome fear," said James Paulsen, chief investment officer for Wells Capital Management, Minneapolis. "People are saying, ‘Gee, not only are we not going to have a depression, but it looks like we’re actually going to have a recovery.’"
Stock is still available at a "30-percent-off sale price," and there is excess cash lying around, said Paulsen. "That boatload of cash is on hand at so many companies because nine months ago everyone was saying cash was king — even though they were earning nothing on it," he said.
While he doesn’t expect a red-hot M&A market the rest of this year, he thinks it will continue to noticeably improve.
"It seems like a lot is happening because finally, after the whole economic crisis, some deals are actually getting done," said Jonathan Marino of the M&A Journal in New York. "It’s not driven by availability of money because credit markets are just as frozen as they were in May, but many acquirers have cash on their balance sheets."
Cash lets firms avoid issuing stock or paying high loan costs, he said.
"Some of these deals are tacit indication that the companies can’t grow their businesses much beyond what they are now, so they’re looking to fill some holes with key partnerships," said Paul Nolte, director of investments for Hinsdale Associates in Hinsdale, Ill. "Certain companies reach a ceiling where they are limited in how fast they can grow their revenue organically."
Firms aren’t using their traditional sources of financing, said Nolte. In the case of Kraft, financing for the deal was lined up well in advance of an offer being made.
"It’s really a broad spectrum this year," he said. "We’ve seen deals in the food industry, entertainment, technology and oil industry."
There will be windfalls for some investors. Greatest gains typically fall to those holding shares of the company being bought, especially if there are several competitors due to a hostile bid. Meanwhile, the acquiring firm’s stock often suffers on worries over whether the merger is logical or could stretch finances too thin.
Investors are buying a variety of shares in the likely target industries. Much of the acquisition activity will take place in digestible smaller firms, along with some larger companies if they have strong product lines.
The fact that mining company BHP Billiton has built up $18 billion in cash, for example, has investors looking at its possible acquisition of Freeport-McMoRan Copper & Gold Inc., Potash Corp. or Anglo American Plc.
Nonetheless, everyone is still into low risk these days. Lenders aren’t over-lending, individuals aren’t overpaying for houses, most firms aren’t expanding their business, and assets are still priced for "the depression that wasn’t," Paulsen said.
The 2009 merger environment is "high risk and high reward," according to a recent report by the Transaction Services unit of PriceWaterhouseCoopers. It believes a number of deal makers, including private equity firms, are eager to get back to business. While some companies will merge for survival, others will simply decide it is a good time to combine with a partner to prepare for an uptick in the economy.
Here are the sectors best-positioned for mergers and worthy of monitoring by investors, according to the PriceWaterhouseCoopers partners:
— Technology is "poised for another wave" of consolidation because many of its companies have mature business models and healthy balance sheets.
— Energy is experiencing greater stabilization in crude oil prices. This industry features excellent cash flow and growth prospects that make it a "consolidation hot spot."
— Pharmaceuticals and health care are now in the merger "spotlight," no matter what type of reform may be passed in Washington. Drug companies are seeking to fill their product pipelines through acquisitions, while some health care companies will be realigning their business models to take advantage of a new industry environment.
— Financial services consolidation will be "rampant," driven by mergers of necessity based on the distressed circumstances of some competitors. There will a flight to quality banks in the top one-fourth of the banking industry because they aren’t so hamstrung by government oversight.