Market’s Decline, Higher Rates Slow Pace of Mergers
Stock market volatility and higher interest rates have put the brakes on the merger boom--removing another source of support for the bull market.
The number of deals is down about 15% so far this year from the same time last year, data show.
Through Tuesday, 3,804 mergers involving U.S. companies have been announced this year, with a value of $736 billion, according to Thomson Financial Securities Data.
That compares with 4,459 deals announced during the same period last year.
Though the first few months of this year had some merger momentum, the action slumped in April, when 626 deals were announced, down 32% from a year earlier.
The broad decline in share prices in recent months has withered the currencies of potential acquiring firms. They risk taking a further hit from nervous investors if they announce a deal--as UAL Corp. showed Wednesday, when its stock tumbled $7.19 to close at $53.19 after the airline giant bid $4.3 billion for US Airways.
“It’s a combination of higher interest rates and lower equity prices; it’s fatal for deal activity. We haven’t experienced this in five years,” said Richard Peterson, market strategist with Thomson Financial.
Indeed, overall takeover activity has slowed to the fewest number of deals since 1995.
Excluding the pending $182-billion deal between America Online and Time Warner, which represents about 25% of this year’s total deal volume, the dollar value of announced deals is down 17% from a year ago.
“You had this tremendous momentum from 1999 and 1998 and then, bam, April hits and big public mergers just weren’t happening,” said Kurt Kunert, editor of Mergerstat, a merger database. “Who wants to announce a deal in this market?”
May has continued the trend. So far this month, $98 billion of deals have been announced, down 29% from May 1999. The number of deals, at 545, is down 37%.
Higher interest rates, and the fear of more rate hikes by the Federal Reserve, have contributed to the merger slowdown and may continue to do so, experts say. Higher rates boost companies’ borrowing costs.
Still, merger volume obviously hasn’t dried up completely. Many potential acquiring firms remain motivated by the need to grow larger to compete in the global economy--and they’d rather acquire existing businesses than build new ones.
“A weak stock market hurts activity, since deals depend on the stocks for currency, but I think we will have a very active year,” said Tom Burnett, president of Merger Insight, a New York research firm. “This year will still be the third- or fourth-busiest for mergers ever, and that’s nothing to be ashamed of.”
Last year set a record for mergers, with 12,241 announced deals, worth $1.7 trillion.
One sector of the deal market where activity still is rising: leveraged buyouts of public companies by investment funds, usually with management’s participation.
A total of 31 companies have gone private this year via buyouts as of the end of April, compared with 74 in all of 1999, according to Mergerstat.
“A lot of companies don’t think they are being fairly valued by this market. They feel they are being left behind, so are considering going private,” Kunert said.
In March, Silicon Valley pioneer Seagate Technology Inc. announced a complex $20-billion transaction that would make the world’s largest computer disk drive maker a private company.
Many analysts also expect more merger activity this year in the battered technology sector, especially between strong public companies and smaller private ones.
Internet companies that desperately need cash infusions, but can’t tap the public market through a first-time stock offering, might be better off sold to the highest bidder, bankers and analysts said.
Indeed, as of Tuesday there have been 809 mergers this year in which a privately owned technology firm was acquired, compared with 427 such deals in the same period last year, according to Mergerstat.
And more will try to merge, to have a better shot at going public later, said Charles Cory, managing director of mergers and acquisitions at Morgan Stanley Dean Witter’s Palo Alto office.
By merging with a competitor, “They can say, ‘We’re not one of four companies, we’re one of two’ ” in a business, Cory said. This potentially makes a better story for investors looking for businesses with critical mass.
Investment bankers expect tech giants such as Cisco Systems, Intel and Lucent Technologies to view the sharp decline in many smaller tech companies’ stocks as an opportunity to buy more market share or promising new technology on the cheap.
Cisco, which dominates the market for specialized servers called routers that control Internet traffic, has made nine acquisitions this year totaling $2.5 billion. It’s expected to complete 20 to 25 deals by year-end.
“We believe there are lots of opportunities in down markets,” said Cisco spokeswoman Jeanette Gibson.
But don’t expect every consumer-oriented Web site with a flagging stock to get snapped up.
“A low stock price may imply a low value--or no value,” Cory said.
“Those companies that need funding now will be considering: Should I sell myself?” said Davies Bellers, a senior managing director at investment banking firm Bear Stearns & Co. in Los Angeles. Continued market volatility, he said, “will accelerate the social Darwinism in the tech sector.”
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Staff writer Joseph Menn contributed to this report.
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Deep Freeze for Deals?
The number and value of merger deals among U.S. companies continue to slide, as the stock market’s decline and rising interest rates put a damper on activity. Monthly totals of announced deals:
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May*: 545
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* May data through Tuesday, including the UAL bid for US Airways.
Source: Thomson Financial Securities Data
