July 14, 2024

DealBook: Pace of Mergers Takes a Midyear Pause

The revival in mergers this year has taken some time to catch its breath.

After a blistering start to the year, deal volume slowed down in the second quarter as uncertainty again weighed on the markets. While many deal makers say that the number of transactions will continue to rise, the pace of that activity remains uncertain.

Deals totaling about $1.4 trillion were announced in the first half of the year, according to Thomson Reuters data, a 35 percent increase over the same time last year. That is the strongest start to deal-making since the financial crisis, as corporate boards, armed with cash and cheap financing, felt comfortable enough to seek out growth by acquisitions.

But the confidence of executives appears to have been shaken by fears of a slowing economic recovery and persistent worry over Greece’s fiscal troubles. About $631.4 billion worth of deals were announced in the second quarter, down 20 percent from the first quarter.

The biggest question is whether management teams can be persuaded to pursue acquisitions they have already been weighing.

“Is this a real slowdown, or is this temporary?” asked Mark Shafir, the global head of mergers and acquisitions at Citigroup. “We think that unless there is a major slowing of world economy, there’s some room to grow.”

Bankers and lawyers say that over the first half of the year, the majority of deals struck have been by strategic buyers looking to augment existing businesses. As some companies have struggled to find ways to grow organically, buying new business has gained favor in some corporate suites.

Johnson Johnson’s $20.8 billion acquisition of Synthes reflected the American health giant’s desire to expand its presence in the increasingly lucrative medical devices sector. With low debt, $28 billion in cash on hand and enormous free cash flow, Johnson Johnson was long seen by analysts as ready to make a big purchase.

It’s unusual, but many deals announced this year have yielded rises in the stock of the acquirer. While many times the buyer’s shares go down amid fears that the deal may be overvalued, advisers say that the phenomenon highlights shareholder approval in the right cases.

“Investors are being supportive and sometimes highly supportive of ideas that make sense,” said Michael Boublik, Morgan Stanley’s chairman of mergers and acquisitions for the Americas.

One of the consequences of the mostly stable economic conditions from the first half of the year is that potential buyers and sellers are finding it easier to come to an agreement over the valuation of a particular deal. The average premium for an American target company to its stock price four weeks before a deal announcement shrank to 30.7 percent, from 37.6 percent.

Takeovers by private equity firms in the first half also rose over the same time last year, to about $114 billion. But that is a decline from the latter half of last year, when the largest takeovers since the financial crisis, like the $5.3 billion buyout of Del Monte Foods, were announced.

Deal experts say that while buyout firms are still poised to benefit from the positive mergers environment, they face more constraints than they did in the credit boom. The resurgence of determined corporate buyers has made many auctions costlier. And while debt financing remains cheap and plentiful, private equity firms are more hard-pressed to write big equity checks.

And club deals — when several buyout firms band together to buy a target they could not afford on their own — have become less common, amid pressure by institutional investors.

“Our sense is that private equity activity levels are continuing to be more important to the M. A. market than they were two years ago,” said Stephen Arcano, the leader of the mergers practice at Skadden, Arps, Slate, Meagher Flom. “But I don’t think we’re poised for a surge in private equity activity.”

Yet private equity firms have been busy selling companies to generate returns for their investors. In perhaps the most extreme instance, Kohlberg Kravis Roberts sold Primedia for $525 million, closing out a 22-year investment in the media company.

Article source: http://feeds.nytimes.com/click.phdo?i=5f62657d1686bc1591aedf70ba00d339

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