Street M&A set to sizzle next year
As hot as the mergers market is now, it’s about to get hotter. All the variables are in place for acquisitions in 2007 to surpass this year’s record $3.6 trillion.
US stocks are trading close to the cheapest price-to-earnings levels in a decade. Yields on junk bonds used to finance takeovers also are near 10-year lows, according to Merrill Lynch & Co. Leveraged buyout firms have $1.6 trillion to spend, Morgan Stanley estimates.
“There hasn’t been a period I’ve seen in my career when all of those factors that influence M&A activity have been as strong,” said Stefan Selig, the global head of M&As at Charlotte, North Carolina-based Bank of America’s securities unit. Mr Selig, 43, started at First Boston in 1984, working for Bruce Wasserstein and Joseph Perella.
Bank of America, Morgan Stanley, Deutsche Bank and JPMorgan Chase & Co all forecast that takeovers may climb at least 10% next year. An increase of that magnitude would boost fees from advising companies and buyout groups to a record $24 billion, according to estimates.
The conditions have never been “even close” to what they are today, said Felix Rohatyn, 78, a veteran investment banker who spent half a century at Lazard Freres & Co and now works as an adviser to Lehman Brothers Holdings CEO Richard Fuld.
New York-based securities firms Goldman Sachs Group, Morgan Stanley, Lehman and Bear Stearns may need the extra fees to keep profits growing after they earned a record $23 billion in 2006. Merrill, which rounds out the top five, reports its latest financial results next month.
Net income at Goldman, Wall Street’s most profitable firm, probably will drop 13% in 2007 as trading revenue slows, said Sanford C Bernstein & Co’s Brad Hintz, the third-ranked US brokerage analyst by Institutional Investor. Chief financial officers at Fortune 1000 companies consider mergers and acquisitions their top priority, according to a survey in September of 100 executives by Morgan Stanley.
Last year, CFOs ranked M&A as the seventh most important use of capital. The merger pipeline at UBS is “significantly” higher, said Alexander Wilmot-Sitwell, 45, the firm’s London-based co-head of investment banking. Vodafone Group, Barclays and Air Liquide are among European companies whose shares gained this year on speculation they may be takeover targets.
Mining company Anglo American, with a market value of £36.5 billion ($71.5 billion), also may be bought, UBS analysts wrote in a December 15 note to clients. In the US, more than $170 billion of deals were announced this month. Delta Air Lines rejected an $8 billion bid from US Airways Group on December 19.
Shares of Express Scripts, the third-biggest US manager of drug benefits, rose about 6% since December 18, when the company made an unsolicited $26 billion bid for larger rival Caremark Rx, which some investors say may put Maryland Heights, Missouri-based Express Scripts in play.
The last time the backdrop for M&A was anywhere near as good was in the late 1980s, when former Drexel Burnham Lambert junk-bond chief Michael Milken was helping finance hostile takeovers and US stocks lost $500 billion of market value in the crash of October 1987.
Even then, 10-year US treasury yields were about twice the current 4.59%, making it more expensive to pay for deals. Only five buyout firms had investment funds of more than $1 billion, Morgan Stanley research shows. Now, 115 have at least that much to spend.
“The financing markets today are much more robust,” said Frank Yeary, 43, global head of M&A at New York-based Citigroup, which advised on eight of this year’s 10 biggest deals including AT&T’s $83 billion takeover of BellSouth.
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