The US merger and acquisition market is showing strong signs of revival with its dollar value soaring 30% in 2004. Corporate execs may feel pressured for time amid prospects of a Fed rate hike and recent dollar slide. Normally, this would bring down the appetite for acquisitions. Now, against the background of healthy corporate profits and balance sheets that are flush with cash, corporate managers are enthusiastically pursuing big and small fish in the capital market.
Among the big technology deals that are projected to boost competition and consolidate the market are the Oracle-PeopleSoft merger valued at $10.3 billion, Nextel-Sprint deal of $33 billion and the acquisition of medical equipment maker Guidant by Johnson & Johnson for $22.5 billion. These deals are mostly driven by the need for rebound and quest for new growth. Oracle made it clear that their primary interest is PeopleSoft’s client base rather than technological expertise of the company.
Technology sector has seen this month the biggest purchase of a US business by a mainland Chinese manufacturer, as Chinese leading PC maker Lenovo formerly known as Legend acquired IBM’s personal computing unit allowing Big Blue to concentrate on its service business. The deal will elevate the obscure Chinese producer to a global-brand PC company.
The market has welcomed to most of the deals even though most of them are directed at the riskier aim of revenue growth rather than at cost-cutting, and the average premium above the stock price of the acquisition targets has risen to 28% this year against 22% in 2003.
"The environment for risk-taking has changed in the past six months," says Jack Levy, co-chairman of mergers at Goldman Sachs. "Before then, boards [of directors] were fearful the market would not reward deal-making."
For example, GE’s stock is up 10% since Nov. 1 even with a $1.1 billion pending acquisition of water-treatment company Ionics Inc. GE is going to buy at a 50% premium.
A lot of companies including technology giants like Yahoo!, Google and Cisco Systems are shifting away from mega-deals and concentrating instead on smaller acquisitions targets. Thus, Yahoo! bought 14 businesses over the past two years for talent and technology to support or complement its existing businesses.
Merger activity is good news for the stock market suggesting it retains some value in the wake of strong corporate earnings seasons.
"To the extent that there’s a rise in M&A, that suggests there’s real value to the market," says William Miller, of mutual-fund giant Legg Mason in Baltimore.