M&A Is Back

Mar. 01, 2010 2:43 PM ETMRK, KO, ALPMF, OSIP7 Comments
Charles Lieberman profile picture
Charles Lieberman
Merger activity is picking up once again, although the transactions are quite different from most of the deals done in 2005 and 2006. Many of the deals that preceded the recession were done by private equity firms using a lot of debt to finance the buyouts. As purely financial deals, they needed a healthy economy to perform well, so many are struggling now under a mountain of debt at a time of weak sales.
In contrast, the deals being announced now are strategic, initiated by companies within the same industry seeking complimentary businesses or overlapping activity, as cost cutting can significantly increase competitiveness. The other implicit, important message behind these deals is that stocks are cheap and firms have enough confidence in their outlook to go forward with acquisitions.
M&A activity is dominated these days by strategic deals, not financial deals. At this very moment, Merck (MRK) is buying Millipore (MIL) (beating out Thermo Fisher (TMO)), Pepsi (PEP) and Coke (KO) are buying their bottling companies, AIG (AIG) is selling off an insurance division to Prudential (PRU), Yara (OTCPK:YARIY) is buying Terra (TRA), and Astellas (OTCPK:ALPMF) is going hostile to buy OSI Pharmaceutical (OSIP).
These deals are to gain scale, broaden product lines, gain access to raw materials, or more generally, to increase competitiveness and the surge started in 2009. Many mergers do not work out well for acquiring shareholders, but these types of deals are far more likely to be successful because acquiring management knows their own industry.
Merger activity tends to increase only when conditions are favorable, which requires the buyer to think they are able to get the acquisition done at a good price. Mostly, this means making payment with a currency thought to be expensive to acquire stock that is thought to be cheap.
Sometimes the “currency” that’s overvalued is debt, sometimes cash, and sometimes securities of one sort or another. When stock prices are high, it is unattractive to use cash or debt as the acquisition currency, so stock is used.
However, the acquiring company must sport a higher price earnings multiple than the acquired. These days, stock values are low, so many deals are being financed with cash or debt.
The implicit message of the pickup in merger activity is that both cash and debt are expensive or overvalued and worth using to pay for cheap stock. How else can we explain premiums of 25% to 40% being paid for acquisitions?
Clearly, the acquirer thinks the deal is worthwhile and, since they are mostly in the very same industry as the acquired, they should have a very good sense of the business prospects of the companies being bought. We agree and think stocks are attractive.
Disclosure: No Positions

This article was written by

Charles Lieberman profile picture
Dr. Charles Lieberman serves as chief investment officer for Advisors Capital Management L.L.C., an independent investment advisory firm, servicing financial advisors and private clients throughout the country. Dr. Lieberman has oversight responsibility for managing its highly customized separately managed strategies, growth, U.S. dividend, income with growth, balanced, fixed, smid and international, all of which use individual securities. He also manages the income with growth strategy.  A graduate of the Massachusetts Institute of Technology with a bachelors degree in economics, he earned a Ph.D. in economics from the University of Pennsylvania before beginning his professional career as an academic at the University of Maryland and, subsequently, at Northwestern University. After five years in academia, Dr. Lieberman joined the Federal Reserve Bank of New York as head of its Monetary Analysis Staff before coming to Wall Street. At Morgan Stanley and Shearson Lehman Brothers, he focused on the debt and equity markets, respectively. In 1986, he joined Manufacturers Hanover Securities Corp. as chief economist and head of research and retained that position through the subsequent mergers with Chemical Bank and Chase Manhattan. During his 11-1/2 years with these banks, he worked intensively with the Bank’s clients, as well as the Bank’s trading desks and portfolio and sat on the Bank’s Markets Committee, which was responsible for funding, interest rate and currency risk management. He also traveled extensively on behalf of the Bank, both domestically and internationally, consulting with senior government officials and portfolio managers of some of the largest financial institutions in the world. In 1997, he left Chase to found, along with co-founder Henry Kaufman, the global macro hedge fund Strategic Investors Management L.L.C. and to serve as its managing partner and principal strategist. In this role, Dr. Lieberman constructed leveraged investments (some hedged, some unhedged) on a global basis. Dr. Lieberman is frequently quoted in the media. He has appeared often on CNBC, Bloomberg radio and television, CNN, CNNfn, The Nightly Business Report on PBS, Reuters Financial Television, Fox Business News, and the major television networks. He is often quoted by Bloomberg, Reuters, The Wall Street Journal, The Washington Post, Barron’s, and numerous other domestic and international business publications.

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