Mergers and acquisitions gained momentum in the first quarter with more than 2,034 cross-border transactions and 10 hostile takeovers signaling a recovery from the worst deal market in six years.
Global takeovers rose 5 per cent to $498.24 billion from a year ago. Purchases by companies outside their home markets more than doubled to $249 billion, while $17.46 billion of hostile acquisitions were announced, up from $4.29 billion a year earlier.
Chief executive officers are gaining confidence as stock markets rally and a thaw in credit markets makes it easier to fund deals. The Standard & Poor’s 500 Index rose 4.9 per cent in the quarter, extending last year’s 23 per cent climb. Interest rates slashed during the global economic crisis are at historic lows in the US, the UK and the 16-nation euro region.
“Assuming the economy doesn’t double dip, we are cautiously optimistic for the rest of the year,” said Mark Shafir, global head of M&A at Citigroup Inc, which advised American International Group Inc. on the $35.5 billion sale of its Asian life insurance unit to Prudential Plc, the quarter’s largest deal.
Mergers and acquisitions may increase 15 per cent to 20 per cent from 2009, said Shafir, returning to “more familiar conditions” than last year, when takeovers slumped 27 per cent to $1.8 trillion, the lowest level since 2003
Hostile takeovers
A pickup in hostile takeovers that began in the fourth quarter “reflects increased confidence on the part of some corporate clients,” said Shafir, whose firm advised Kraft Foods on its $21.4 billion hostile takeover of Cadbury Plc. The companies reached a deal in February after a four-month battle.
Citigroup, based in New York, ranked fifth among takeover advisers in the quarter after Goldman Sachs Group Inc., Zurich- based Credit Suisse Group AG, Frankfurt-based Deutsche Bank AG and JPMorgan Chase & Co.
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This year’s hostile deals include Astellas Pharma Inc’s $3.5 billion bid for OSI Pharmaceuticals in March and Air Products & Chemicals Inc’s $5.1 billion unsolicited offer for Airgas Inc in February. Citibank is advising Astellas.
“We’re likely to see more hostile M&A activity because companies have access to capital that allows them to pay in cash,” said Jeffrey Kaplan, global head of M&A and corporate finance at Bank of America Merrill Lynch, which is advising Airgas in its defense against Air Products. “Equity values have increased such that buyers are willing to use their stock as well.”
Debt markets
Company debt rallied for the fourth-straight quarter as US consumer confidence gained in March and corporate defaults declined from record levels, according to a Bank of America Merrill Lynch index. Borrowing costs declined in the first quarter to the lowest since 2005.
Kraft sold $9.5 billion of debt to finance the cash portion of its takeover of Cadbury in the biggest bond offering by a non-financial company in almost a year. The market recovery also created buying opportunities for companies looking to expand abroad. More than half of the 20 biggest deals of the quarter were cross border, including the $10.7 billion acquisition of Zain Africa BV by billionaire Sunil Mittal’s Bharti Airtel Ltd.
Bright Food Group Co, Shanghai’s biggest food company, today raised its offer for CSR Ltd’s sugar unit to A$1.75 billion ($1.6 billion). The Australian company had rejected an earlier bid from Bright Food.
‘Opportunistic’ buying
Deals in Latin America got off to the best start in at least a decade, driven by consolidation in the commodities, food and telecommunications industries in Brazil and Mexico. America Movil SAB’s $25.7 billion all-stock purchase of Carso Global Telecom SAB in Mexico was the No. 2 takeover of the quarter.
“This is an opportunistic moment in which buyers can pay a full price at fair multiples,” said Andrew Bednar, head of M&A at Perella Weinberg Partners LP, the New York-based boutique investment bank. “As M&A heats up the equity markets follow and it becomes more challenging to pay an acceptable premium without correspondingly higher multiples.”
Perella advised Merck KGaA on its $6 billion acquisition of Millipore Corp in March, people close to the situation said. Merck’s offer was 15.3 times Millipore’s earnings before interest, taxes, depreciation and amortisation. Merck offered 42 per cent more than the shares were worth before the deal was announced.
The average premium paid for companies in the first quarter was 20 per cent, down from 31.44 per cent in the same period a year ago. The decline signals a return to a more normal conditions, said Citigroup’s Shafir.
While the market for takeovers is improving, the recovery has been less robust than after the downturn in 2003. In the first quarter of 2004, takeovers more than doubled compared with the year-ago quarter.