Mergers & Acquisitions Surge May Spur Markets

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The New York Sun

America’s mergers and acquisitions craze — a major market catalyst that virtually vanished about a year ago amid the rapidly expanding credit crisis — may be mounting a comeback, Wall Street pros say.

Evidence that a more feverish M&A pace is taking shape includes the Korea Development Bank’s confirmation yesterday that it is considering injecting capital into struggling investment bank Lehman Brothers, possibly joining a number of other overseas banks making sizable investments in big American financial companies, and the recent $52 billion acquisition of Anheuser-Busch by Belgian brewer InBev.

This increased activity means that the markets, burdened with a slew of serious and well-publicized economic and financial illnesses that have had them stuck in a rut in recent months, at long last may have found fresh stimulus to help get cracking again.


The recent deals are “a step in right direction because it could help pump up stock prices and get rid of some of the gloom and doom,” a Los Angeles-based money manager, Tom Postin, tells me.

M&A activity increased in June and July, with transactions totaling $179.1 billion in July, the biggest monthly figure since July 2007, when it ran just shy of $200 billion. In June, the number of disclosed M&A transactions amounted to about $170 billion. The number slipped in August — down 63%, to $157 billion, according to Dealogic — but this is often a slow month, as bankers head for vacation.

A major spur for deals in the past year has been a wave of foreign buying, fueled by America’s depressed stock market and weak dollar. While the greenback has shown some recent vigor, the view in many investment quarters is that such strength is unlikely to have much staying power, given a weakening American economy, rising inflation, illiquid credit markets, and an enormous budget deficit.


If such thinking is correct, waves of foreign buying could become conspicuous once again, as the M&A market capitalizes on a new slide in the greenback.

David Wright, an analyst at one of the country’s leading investment newsletters, the Dow Theory Forecasts, says he expects the heated-up M&A activity to continue to accelerate. “You’ve got attractive valuations, earnings holding up, and lots of cheap companies ripe for the picking,” he says.

In conjunction with this thinking, the newsletter recently screened about 5,000 companies for the most attractive M&A candidates. Its focus was on companies with solid balance sheets, strong cash flow, and moderate debt levels. Also factored in was the enterprise value (the sum of stock market value and debt, minus cash, divided by earnings before interest, taxes, depreciation, and amortization). Attractive enterprise value ratios are a key feature of M&A transactions because the metric approximates a company’s total takeover price relative to its earnings power.


Among the 16 names that popped up in the newsletter’s screening as ripe for M&A are some of America’s best-known companies, such as Best Buy, Coach, and Hewlett-Packard. Others that made the list were Cooper Industries, Family Dollar Stores, VF Corp., Garmin, Western Digital, Manitowoc, Harris Corp,, Laboratory Corp., Nucor Corp., Paychex, Ensco International, Parker-Hannifin Corp., and NBTY.

Two of Dow Theory Forecasts’ favorite M&A candidates are Harris, a leading maker of communications systems, and Laboratory Corp., a provider of medical-testing services.

Mr. Wright estimates that the takeover prices for these M&A picks would be well above their current market levels. Absent any deal, though, he says these stocks, based on solid company fundamentals, could outperform the market by about 10% to 15% over the next 12 months.

Speaking of M&A candidates, a number of investment bankers have long been expecting an acceleration of multibillion-dollar deals in the energy sector, with some industry giants taking the buyout route as a means of expanding their reserve base. Indicative of this trend is Chevron’s announcement early this week that it will buy Chesapeake Energy’s natural gas properties in Arkansas for $1.9 billion.

American private equity firms announced $9.7 billion of deals in the oil and natural gas sector globally this year, up 47% from the year-earlier period, according to Dealogic. Other large M&A deals in the sector include the $3.87 billion purchase of Expro International Group by a consortium of companies, including Goldman Sachs Group’s private equity arm, and the $1.2 billion acquisition of pipeline and refinery operator Gibson Energy Holdings by Riverstone Holdings and the Carlyle Group.

A former energy adviser to Carl Icahn, Alan Gaines, says he is betting that energy biggies such as ExxonMobil, the Shell Group of Companies, and ConocoPhillips are logical buyers of companies that own shale properties. His top takeover targets in this arena are Devon Energy, XTO Energy, Chesapeake Energy, Petrohawk Energy, EOG Resources, and Range Resources.

Noting that many of these companies trade below asset values and have strong management, Mr. Gaines figures they all have the potential to be acquired over the next few years, at roughly 50% to 100% premiums above their current stock prices.

The New York Sun

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