A banner year for mergers and acquisitions was spurred by a return to the bargaining table of strategic buyers in a range of different industries. From health care to media, big corporations struck transformative deals, often consolidating industries by buying up competitors. Deals begat deals, and a flurry of reactionary acquisitions followed.
In previous merger booms, other factors were at work. The frenzied deal-making of the dot-com bubble was driven by the emergence of web companies from Silicon Valley. And the leveraged buyout boom before the financial crisis was led by private equity titans striking mega-buyouts.
But this year, it was traditional corporations - mostly in North America - doing most of the big deals. The drug maker Actavis agreed to acquire the Botox maker Allergan for $66 billion. Comcast struck a $45-billion deal for Time Warner Cable. And AT&T spent $49 billion to buy DirecTV, the satellite television provider.
"This was the year of the return of the transformational deal," said Mark Shafir, co-head of global mergers and acquisitions at Citi. "There was pent-up demand."
Coming five years after the end of the financial crisis, the flurry of deal-making arrived later than many thought it would. It took that long, however, for executives and directors to be comfortable taking risks.
"Post crisis, the M&A market was essentially flat and below potential," said Jim Head, co-head of mergers and acquisitions for the Americas at Morgan Stanley. "Companies stood back, built up excess capital and were rewarded for essentially buying back stock and not doing anything too risky. Now, after a prolonged period, they are looking at a landscape that is reasonably attractive."
The relative stability of the stock markets, and the general absence of unexpected macroeconomic surprises, meant that for the first time in years companies were willing to move ahead with deals.
Other factors were also at work. Debt remains cheap, making it easy for companies to borrow and go after big targets. Stocks have risen in recent years, giving companies a strong currency to use in mergers that include a stock component.
And there was a sense among executives and directors that investors wanted deals to happen. After many acquisitions were announced, the buyer's stock went up, which was usually not the case.
For example, when Medtronic agreed to buy the rival medical device maker Covidien for $43 billion in June, its stock jumped and has risen 22 per cent since then.
"Since last fall there has been a marked preference among institutional shareholders in seeing excess cash reinvested in organic growth opportunities and M&A, versus being returned to shareholders in the form of one-time dividends or large share repurchases," said Patrick Ramsey, co-head of Americas M&A at Bank of America Merrill Lynch.
Yet while the deals being struck were large and bold, they were also for the most part safe bets. Rather than move into new industries or wager on the unknown, companies largely went after deals that wouldn't surprise investors.
"Shareholders and boards are still nervous about deals that are not aligned with their current core business," said Chris Ventresca, co-head of global mergers and acquisitions at JPMorgan Chase.
Reynolds American consolidated the cigarette market by agreeing to buy Lorillard, the maker of Newport, for $27 billion. Holcim and Lafarge agreed to combine in a mega-deal, consolidating the global market for cement and construction materials.
"Most of the transactions were very close to home," said Head of Morgan Stanley. "Many of these are deals that boards and companies have looked at for years. These are relatively lower-risk deals."
One notable exception was forward-looking Facebook, which spent $21 billion on WhatsApp, a messaging application with just $10 million in revenue and $138 million in losses in 2013.
And when companies strayed too far afield, investors expressed their discontent. The stock of LabCorp, the medical diagnostics company, took a sharp hit after LabCorp moved into the contract research sector with a $6 billion deal for Covance.
In many cases, strategic buyers reached too far. Only eight of the 15 largest transactions tried were secured. Seven, including the two largest, were either rejected or withdrawn. Pfizer was willing to pay more than $100 billion for the British drug maker AstraZeneca but faced political opposition and withdrew. Rupert Murdoch's 21st Century Fox made an offer to buy Time Warner for nearly as much but was rebuffed.
And as companies pushed to consolidate, they ran into antitrust concerns. SoftBank, owner of the wireless network Sprint, decided against trying to acquire T-Mobile USA for fear the deal wouldn't pass muster in Washington. Dollar General will have to divest itself of a huge number of stores if it prevails in its pursuit of Family Dollar, which has agreed to a lower offer from another rival, Dollar Tree, largely because of the antitrust question. And regulators are still scrutinising Comcast's deal for Time Warner Cable.
"Prior to a deal being announced, companies are doing more due diligence about a successful path toward regulatory approval," said Ventresca of JPMorgan.
For much of the year, another factor influencing strategic deals was so-called inversions, in which a United States company acquires an overseas competitor and reincorporates abroad to lower its tax bill.
Pfizer's deal for AstraZeneca would have been structured as an inversion, and Medtronic's deal for Covidien is the largest such agreed deal of the year.
Political opposition to such deals, however, led the Obama administration in September to change tax rules to eliminate some advantages of inversions. Weeks later, AbbVie, a drug maker based near Chicago, walked away from a $54 billion agreement to acquire its Irish rival Shire, and other planned inversions were put off.
"The inversion play, which is arguably stopped dead in its tracks, was a big driver," Mr. Shafir of Citi said.
One notable absence in the deal-making landscape this year was private equity buyers. Instead of going after big leveraged buyout targets, sponsors largely focused on buying smaller companies owned by other private equity firms and units being spun off large conglomerates.
This was partly because corporations - with strong stock as a currency and cheap debt at the ready - were able to pay higher prices than private equity firms.
"The private equity market is still very healthy," Mr. Head said. "But strategic buyers' ability to pay is beating out sponsors in the largest part of the market."
The absence of private equity buyers from the biggest auctions meant that companies selling themselves had fewer potential buyers than they might have a year ago. The result was a market in which buyers had to pay high prices to secure the targets they wanted, but not prices so high that investors soured on the deal.
"Sellers are requiring premiums, but premiums that are not so outsize that the buyers can't afford it," Mr. Ventresca said.
Looking ahead to next year - with the markets still strong, debt still cheap and no big crises on the horizon - deal makers are expecting more of the same.
"If C.E.O. and board confidence levels are sustained, this high pace of M.&A. activity will continue," said Mr. Ramsey of Bank of America Merrill Lynch. "All the other necessary ingredients are there."
In previous merger booms, other factors were at work. The frenzied deal-making of the dot-com bubble was driven by the emergence of web companies from Silicon Valley. And the leveraged buyout boom before the financial crisis was led by private equity titans striking mega-buyouts.
But this year, it was traditional corporations - mostly in North America - doing most of the big deals. The drug maker Actavis agreed to acquire the Botox maker Allergan for $66 billion. Comcast struck a $45-billion deal for Time Warner Cable. And AT&T spent $49 billion to buy DirecTV, the satellite television provider.
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"This was the year of the return of the transformational deal," said Mark Shafir, co-head of global mergers and acquisitions at Citi. "There was pent-up demand."
Coming five years after the end of the financial crisis, the flurry of deal-making arrived later than many thought it would. It took that long, however, for executives and directors to be comfortable taking risks.
"Post crisis, the M&A market was essentially flat and below potential," said Jim Head, co-head of mergers and acquisitions for the Americas at Morgan Stanley. "Companies stood back, built up excess capital and were rewarded for essentially buying back stock and not doing anything too risky. Now, after a prolonged period, they are looking at a landscape that is reasonably attractive."
The relative stability of the stock markets, and the general absence of unexpected macroeconomic surprises, meant that for the first time in years companies were willing to move ahead with deals.
Other factors were also at work. Debt remains cheap, making it easy for companies to borrow and go after big targets. Stocks have risen in recent years, giving companies a strong currency to use in mergers that include a stock component.
And there was a sense among executives and directors that investors wanted deals to happen. After many acquisitions were announced, the buyer's stock went up, which was usually not the case.
For example, when Medtronic agreed to buy the rival medical device maker Covidien for $43 billion in June, its stock jumped and has risen 22 per cent since then.
"Since last fall there has been a marked preference among institutional shareholders in seeing excess cash reinvested in organic growth opportunities and M&A, versus being returned to shareholders in the form of one-time dividends or large share repurchases," said Patrick Ramsey, co-head of Americas M&A at Bank of America Merrill Lynch.
Yet while the deals being struck were large and bold, they were also for the most part safe bets. Rather than move into new industries or wager on the unknown, companies largely went after deals that wouldn't surprise investors.
"Shareholders and boards are still nervous about deals that are not aligned with their current core business," said Chris Ventresca, co-head of global mergers and acquisitions at JPMorgan Chase.
Reynolds American consolidated the cigarette market by agreeing to buy Lorillard, the maker of Newport, for $27 billion. Holcim and Lafarge agreed to combine in a mega-deal, consolidating the global market for cement and construction materials.
"Most of the transactions were very close to home," said Head of Morgan Stanley. "Many of these are deals that boards and companies have looked at for years. These are relatively lower-risk deals."
One notable exception was forward-looking Facebook, which spent $21 billion on WhatsApp, a messaging application with just $10 million in revenue and $138 million in losses in 2013.
And when companies strayed too far afield, investors expressed their discontent. The stock of LabCorp, the medical diagnostics company, took a sharp hit after LabCorp moved into the contract research sector with a $6 billion deal for Covance.
In many cases, strategic buyers reached too far. Only eight of the 15 largest transactions tried were secured. Seven, including the two largest, were either rejected or withdrawn. Pfizer was willing to pay more than $100 billion for the British drug maker AstraZeneca but faced political opposition and withdrew. Rupert Murdoch's 21st Century Fox made an offer to buy Time Warner for nearly as much but was rebuffed.
And as companies pushed to consolidate, they ran into antitrust concerns. SoftBank, owner of the wireless network Sprint, decided against trying to acquire T-Mobile USA for fear the deal wouldn't pass muster in Washington. Dollar General will have to divest itself of a huge number of stores if it prevails in its pursuit of Family Dollar, which has agreed to a lower offer from another rival, Dollar Tree, largely because of the antitrust question. And regulators are still scrutinising Comcast's deal for Time Warner Cable.
"Prior to a deal being announced, companies are doing more due diligence about a successful path toward regulatory approval," said Ventresca of JPMorgan.
For much of the year, another factor influencing strategic deals was so-called inversions, in which a United States company acquires an overseas competitor and reincorporates abroad to lower its tax bill.
Pfizer's deal for AstraZeneca would have been structured as an inversion, and Medtronic's deal for Covidien is the largest such agreed deal of the year.
Political opposition to such deals, however, led the Obama administration in September to change tax rules to eliminate some advantages of inversions. Weeks later, AbbVie, a drug maker based near Chicago, walked away from a $54 billion agreement to acquire its Irish rival Shire, and other planned inversions were put off.
"The inversion play, which is arguably stopped dead in its tracks, was a big driver," Mr. Shafir of Citi said.
One notable absence in the deal-making landscape this year was private equity buyers. Instead of going after big leveraged buyout targets, sponsors largely focused on buying smaller companies owned by other private equity firms and units being spun off large conglomerates.
This was partly because corporations - with strong stock as a currency and cheap debt at the ready - were able to pay higher prices than private equity firms.
"The private equity market is still very healthy," Mr. Head said. "But strategic buyers' ability to pay is beating out sponsors in the largest part of the market."
The absence of private equity buyers from the biggest auctions meant that companies selling themselves had fewer potential buyers than they might have a year ago. The result was a market in which buyers had to pay high prices to secure the targets they wanted, but not prices so high that investors soured on the deal.
"Sellers are requiring premiums, but premiums that are not so outsize that the buyers can't afford it," Mr. Ventresca said.
Looking ahead to next year - with the markets still strong, debt still cheap and no big crises on the horizon - deal makers are expecting more of the same.
"If C.E.O. and board confidence levels are sustained, this high pace of M.&A. activity will continue," said Mr. Ramsey of Bank of America Merrill Lynch. "All the other necessary ingredients are there."
©2014 The New York Times News Service