The Coming M&A Boom

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The Coming M&A Boom

August is ordinarily a slow month for mergers and acquisitions.  But, this past August, deals amounting to $285 billion were in the works, up from just over $200 billion in March, when MetLife bought American International Group for $15.5 billion. 

As reported by Bloomberg,1 of the 10 largest purchases, seven were made with cash.  This should come as no surprise.  Companies have been shying away from M&A, capital spending, and inventory building, while plunging into debt instruments at a lunatic pace.  As a result, the 1,000 largest nonfinancial companies in the U.S. are collectively sitting on $3 trillion in liquid assets.


Intel recently bought McAfee, a maker of anti-virus and security software, for more than $7.5 billion2 — the chip-maker's largest purchase to date.  Acquirers are willing to pay big premiums because, with the stock market depressed, many companies are trading far below their "fair value."  In fact, McAfee stockholders received $48 a share, which is 60 percent higher than the most recent stock price at the time of the announcement of the deal, according to Bloomberg.

These premiums are being justified by the unusual state of bond markets.  During the last year or so, according to Deutsche Bank, 10 records have been set for the lowest yields on bond offerings.  Last summer, for example, IBM issued three-year bonds worth $1.5 billion at just one percent.  Similarly, Johnson & Johnson sold $1.1 billion worth of 10-year and 30-year bonds at record-low rates.

Meanwhile, as reported in Fortune3magazine, BHP Billiton bought Potash Corporation with $45 billion in cash borrowed from only six lenders for the largest takeover of the year up to that point.  In the same month, Sanofi-Aventis offered $18.5 billion for Genzyme. 

In the mid-2000s, there was a boom in private equity funds, which were specifically created to purchase companies.  M&A activity peaked in the month of August in 2007, tallying almost $300 billion in new deals.  Then, with the economic slump, the private equity boom ended.  Specifically, by 2009, the rate of mergers and acquisitions had been reduced by 50 percent. 

During this downturn, corporate profits have remained strong, largely due to cost-cutting.  As a result, companies have seen their cash piles keep on growing.  So now, as firms become more optimistic about the future and fixed-income alternatives remain so poor, it's only logical that they would start pouring money into purchasing other companies...

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