Battling Headwinds in a Shifting M.&A. Marketplace – NYTimes

Posted on April 7, 2011 by

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Where are all the strategic bidders?

It’s true that some blockbuster strategic deals have been announced recently, including AT&T’s $39 billion proposed acquisition of T-Mobile from Deutsche Telekom and Nasdaq’s $11.3 billion unsolicited bid for NYSE Euronext.

But these deals belie a strange fact: strategic bidders, or bidders that are operating companies, appear hesitant to re-enter the takeover market.

Recent transactions display this caution. In August, Dynegy agreed to sell itself for $548 million to the Blackstone Group. Shareholders protested that the price was too low and the deal was canceled.

Carl C. Icahn emerged and offered $665 million for Dynegy, shareholders again protested and that deal fell apart, too. Two financial buyers had been more than willing to bid and shareholders thought another bidder could offer more, but no strategic bidder emerged.

Similarly, in the Del Monte Foods buyout led by the private equity firms Kohlberg Kravis Roberts and Vestar Capital Partners, and the buyout of J. Crew by Leonard Green & Partners and TPG Capital, no strategic bidders emerged.

In both cases, particularly that of J. Crew, there was talk that the price was too low. And in both instances, special mechanisms were eventually put in place to entice third-party bidders, including lowering or eliminating the termination fee typically payable to the initial bidder if a third-party bid succeeded. These changes made it much easier for strategic bidders to make an offer.

Despite speculation that Sears and Urban Outfitters were checking the fit of J. Crew, no offer was made. And no new bidder emerged in the buyout of Del Monte, the largest private equity deal announced last year.

Private equity firms have historically been at a disadvantage on how much they can offer. Strategic bidders can often realize greater cost savings and synergies by eliminating duplicative functions and combining and operating the acquired company more efficiently within their other operations.

This advantage was partly eclipsed in the cheap-money years before the financial crisis. But we are supposed to be back in more normal times, so why are strategic buyers hanging back?

The apparent reluctance may be the result of a fundamental reassessment of the value of takeovers, one that was occurring even before the financial crisis. Since then, chief executives and boards have been more concerned with running their businesses and surviving than with chasing expansion through takeovers. This is particularly true when the chance of success is far less certain, as in hostile takeover attempts.

No chief executive envies John E. McGlade of Air Products and Chemicals, who spent more than $100 million and a year of management time fruitlessly pursuing a hostile bid for Airgas. And BHP Billiton’s chief, Marius Kloppers, made two unsuccessful runs — one at Rio Tinto and the other at the Potash Corporation of Saskatchewan — at a cost of about $800 million.

The last 15 years have produced mergers that proved to be spectacular failures. AOL’s merger with Time Warner and Daimler’s acquisition of Chrysler are among the most notable. Together, these deals destroyed more than $150 billion in shareholder value.

During this time, studies have shown that while there are gains to be made, many M.&A. deals prove unsatisfactory for buyers. McKinsey & Company estimates that only a third of merger deals create value. In a separate study, Prof. Robert F. Bruner, dean of the Darden School of Business at the University of Virginia, found that almost half of deals failed, although these results were skewed by some spectacular miscues.

These studies illustrate that achieving a successful merger is hard work, requiring strategic vision and a focus on integrating the acquired company.

Let’s face it, buying companies is fun — the rush of adrenaline, the challenge of negotiations, money getting thrown around and an elegant closing dinner when the deal is done. But then the real work begins: merging differing business cultures and integrating company operations. Experts increasingly believe that the outcome of a merger depends in large part on the success of these efforts at integration.

Deal-making is also being hampered by a shift in market sentiment away from the conglomerate and toward acquisitions that allow a company to focus on expanding its current lines of business. Few companies today can feasibly buy an orange juice company while owning a rental car company, as Beatrice Foods did in the 1980s.

The numbers appear to bear this out. According to Dealogic, strategic mergers in the United States totaled about $682 billion last year, roughly the same as in 2009 and way down from the $1 trillion in such deals made in 2007.

This is partly a result of the transformation of private equity firms, which increasingly are buying companies in the same lines of business, allowing them to combine functions and wring out additional cost savings once achievable only through strategic acquisitions. K.K.R.’s acquisition of Del Monte, the owner of the Kibbles ’n Bits, Meow Mix and Milk-Bone brands, was the firm’s second pet food acquisition in a year, for example.

As a result, strategic deals now tend to be driven by factors aimed at long-term survival. The T-Mobile deal, in which AT&T made its bid to forestall a sale of T-Mobile to Sprint, is a case in point. AT&T is betting that the operational and cost savings from the acquisition will exceed $40 billion, making it a deal that pays for itself. AT&T also wants to expand its wireless spectrum to meet the explosive demands placed on its network by today’s data-hungry mobile devices — a major reason the company was willing to make a deal that poses so many antitrust risks.

Of course, strategic bidders are still making megadeals, but activity has been concentrated in select industries where consolidation or acquisitions are necessary for survival. In the natural resources and pharmaceutical sectors, for example, blockbuster deals have been robust.

Perceived scarcity is also contributing to deal-making. The headlong rush into so-called cloud computing — the practice of using the Internet to process, manage and store data on remote network servers — led last year to a bidding war for 3Par in which Dell lost out to Hewlett-Packard. After its disappointment, Dell quickly acquired another such company, Compellent Technologies.

Nasdaq’s unsolicited bid for NYSE Euronext — an effort to thwart the merger agreement between NYSE and Deutsche Börse — can also be explained by Nasdaq’s desperation not to be shut out of the accelerating consolidation among global stock exchanges.

With so many factors weighing on deal-makers’ minds, investment bankers will have to work harder to coax companies to the M.&A. table. But when a deal is reached, those same factors may give bidders confidence that their offers will not be trumped.

Despite a rush to view any announced megadeal as a harbinger of a revived M.&A. market, deal premiums may actually decline — and the heady days of merger mania may be slow to return.


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Posted in: Global