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Juicy Returns From M&A May Prove Elusive

08 October, 2009

Investors eager to cash in on the prospect of a revival of merger & acquisition (M&A) activity could see their efforts go to waste as access to financing remains a major obstacle hampering bids.

Analysts urge caution against being too quick to buy into M&A target plays on the prospect of sweetened bids or successful deals, as holding on to them may be of little value in the long run in the absence of catalysts to drive M&A activity.

Equity markets were given a boost by the revival of long-mooted bid plans, including a $16.7 billion bid by Kraft Foods Inc for Cadbury Plc and Abbott Laboratories’ $6.6 billion bid for Solvay SA’s pharmaceutical unit.

Last Thursday, Cisco Systems Inc offered to buy Norwegian video-conferencing equipment maker Tandberg ASA for $3 billion, the latest in a rash of corporate takeovers after a lean period of a year and a half during the financial crisis.

The prospect of a sweetened bid has helped Cadbury’s share appreciate almost 41 percent since the Kraft plan was first mooted in early September as investors sought to cash in on a revised offer for the confectionary firm.

Analysts, however, argue many would-be bidders face a bumpy ride in securing financing for M&A deals, leaving investors with little prospect for making gains on the back of enhanced bids.

“The heavily leveraged debt finance vehicles which were used to fund M&A activity up until summer 2007 are just not there any more,” said Peter Dixon, economist at Commerzbank. “Nobody is prepared to load up on debt and banks are very wary of finance.”

M&A HYPE

Despite the hype surrounding the re-emergence of M&A deals, global activity remains low. The value of deals fell 54 percent to $369.3 billion in the third quarter from the same quarter in 2008, according to Thomson Reuters data.

Howard Wheeldon, partner at BGC Partners, said he did not expect a real resurgence until well into 2010.

“Funding remains difficult, with rights issues for acquisition purposes acceptable if properly reasoned as a sensible consolidation opportunity, but only to a much lesser extent for strategic reasoning,” Wheeldon said.

As European shares had 45 percent of their value wiped out at the height of the financial crisis at the end of 2008, the argument that stocks were cheap gained supporters.

By August last year, stocks in the DJ Stoxx 600 index were trading on just 6.8 times historic earnings, according to Thomson Reuters data. Since then they have clawed back to trade at around 14 times, near levels seen before the crisis first struck in June 2007, casting doubt over the argument that target companies are still cheap.

“Markets are well overvalued right now given the immediate outlook and prospects … a mini bubble if you like and one that at some point is bound to burst,” said Wheeldon.

Still, the prospect of M&A has the ability to further boost markets to drive higher as bid talk hots up.

A combination of M&A expectations, prospects for economic recovery and improving corporate profitability have helped the pan-European FTSEurofirst 300 to rebound 54 percent since hitting a lifetime low in March 2009.

NEW CYCLE

In the wake of the move for Cadbury, French broker Natixis said in a strategy note the second half of 2009 could be the start of a new M&A cycle, citing AstraZeneca, Swedish Match, Whitbread, NH Hoteles, and MAN AG as some of the potential targets.

“Europe could particularly … benefit as its share (of M&A) has declined consistently to reach just 15 percent of amounts invested versus 20 percent in 2000. And the amount of capital raised, but still not allocated to investment decisions, reached $1,015 billion at the start of 2009,” Natixis said.

Gilles Cassagnaud, head of special situations research at Mint Equities, said a more positive mentality and an improvement in risk aversion in favour of dealmakers means the time is right for M&A to take place.

“In this context of global economic slowdown, the strategic benefit of M&A, which allows buying companies to achieve economies of scale and refocus their business model on key growing markets, is even more compelling,” he said.

The FTSEurofirst 300 ended 16 percent higher in 2006, a year when Europe registered M&A worth more than $1.36 trillion to top the previous record of $1.2 trillion set in 1999, Thomson Reuters data shows.

“If you look at what happened in ’05 and ’06, markets boomed very well on the back of a lot of M&A activity,” said Commerzbank’s Dixon. “To some degree it generates momentum because other candidates come into play whether speculative or otherwise and that tends to drive markets higher.”


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Juicy Returns From M&A May Prove Elusive

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