Mergers & Acquisitions Set to Accelerate in 2011 Following Best Start in a Decade

By: Money_Morning

Don Miller writes: So far, 2011 has seen the biggest flurry of mergers and acquisitions (M&A) in a decade, helped by a stock market that's off to a roaring start.

Worldwide deals worth $34 billion were announced on Sunday and Monday, bringing total M&A volume this year to more than $83 billion, up from $67 billion in the same period last year, the Financial Times reported.

The early frenzy of deal making marks the busiest start for M&A activity since 2000, buoying expectations for a rebound in volumes and prices as the economy recovers.

The biggest deals so far have involved companies looking to strengthen their core businesses - a trend analysts expect to continue throughout the year. Two recent examples include:

•Duke Energy Corp. (NYSE: DUK) agreeing to buy U.S. utility peer Progress Energy Inc. (NYSE: PGN) in a stock-based deal worth $13.7 billion, or $26 billion including debt.
•And U.S. chemicals group E.I. du Pont de Nemours & Co. (NYSE: DD) shoring up its position in the fast-growing food and nutrition industry by signing a $6.3 billion deal with Danisco A/S (PINK: DNSOF) of Denmark.
With low valuations for takeover target companies, easier credit terms, and historically high cash balances, the atmosphere for deals in 2011 is as positive as it's been since the credit crisis sent the economy - and M&A activity - into a tailspin.

"A lot of deals which have been in the backlog are finally coming through and companies are moving quickly to get these deals done in case the macroeconomic environment changes," Henrik Aslaksen, global head of M&A at Deutsche Bank AG (NYSE: DB) told The FT.

The surge follows a solid, but unspectacular, 2010 when deals totaled $2.8 trillion, up 23% from $2.3 trillion in 2009, according to The Economist.

Global M&A activity is expected to increase 36% in 2011 to $3.04 trillion, according to a report released late last year by Thomson Reuters and Freeman Consulting Services.

And rising stock valuations are providing a tailwind, as U.S. equities are up almost 8% since the beginning of December.

"There is no better predictor of overall M&A activity than equity markets," Rob Kindler, global head of mergers and acquisitions at Morgan Stanley (NYSE: MS) told The FT. "It is pretty straightforward. If there is volatility, people don't do deals and in down markets people don't do deals."

Consider that the all-time record for merger deals in a single year - $4.3 trillion, according to Dealogic - came in 2007. That's the same year the Dow Jones Industrial Average hit its all-time high.

The feverish pace continued in 2008, until deal volume fell off a cliff after the stock market crashed in October of that year. November 2008 marked the lowest level of M&A activity since 1995, when Dealogic started tracking deal volume.

Morgan Stanley's Kindler feels dealmaking will be robust in 2011, especially if the market returns to the glory days when big-ticket deals were more prevalent.

"There were surprisingly few big deals in 2010," he says. "If those return, then 2011 could prove a bigger year still."

Although the number of deals worth more than $1 billion jumped by more than 25% in 2010, buyers still displayed a cautious approach to big risk.

The United States tallied 40 transactions valued at $1 billion or more last year, up from 32 in 2009. But that number is still well below the peak years of 2007 and 2008 when 79 and 74 big deals were recorded, respectively.

In fact, the largest deal last year was the U.S. Treasury's $48 billion swap of its bail-out investment in insurer American International Group (NYSE: AIG) for a large equity stake - a deal that had most observers questioning whether it even qualified as M&A.

Still, a few of shoppers were on the prowl for multiple big-ticket deals last year, especially in the technology sector. Hewlett-Packard Co. (NYSE: HPQ) inked three big deals in 2010, while International Business Machines Corp. (NYSE: IBM) and Intel Corp. (NYSE: INTC) each closed two of the big transactions as well.

Private equity and hedge funds also returned to test the waters. Overall, buyout shops accounted for seven deals last year valued at more than $1 billion, up from four in 2008 and five in 2009.

Of course, a key difference this year is the cash lining corporate coffers.

The 1,000 biggest companies by market value worldwide have amassed about $1.93 trillion in cash and equivalents based on their latest filings, according to the U.S. Federal Reserve. That's about 57% above the level at the same time in 2006.

"Cash is not only on the sidelines, but actually it's growing every single day," Frank Aquila, a partner at Sullivan & Cromwell LLP, told Bloomberg News.

Investors have put increasing pressure on managers to put those funds to work or return money to shareholders. And acquisitions can accelerate growth in both revenue and market share. They also provide access to markets, products, and technologies that might otherwise be available only after many years of sizable capital investment.

Large global companies also are expected to drive deal making because they can make longer-term strategic bets and pay high premiums, in cash, to buy smaller players.

Last year, the financial sector saw the largest volume of M&A, but the oil industry took the top spot in terms of value. Energy deal making is likely to be strong once again in 2011, with significant activity in mining, health care, and technology. We will probably also see more airline deals in the wake of the recent mergers.

Cross-border deals will figure to be a hot spot, with acquirers from Asia particularly active, where the average cash balance of companies was almost double that of U.S. companies.

Source : http://moneymorning.com/2011/01/13...

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