Big firms are more willing to deal
Kraft Foods Inc.’s $19.4-billion deal, reached Tuesday, to buy British candy giant Cadbury signals that big companies are gaining enough confidence in the economy to once again undertake major mergers.
The uptick in mergers and acquisitions among large companies is an indication that the nascent economic rebound is gaining steam, as well as a welcome sight on Wall Street where investment bankers thrive on fat advisory fees, experts said.
“It’s an encouraging sign for the economy,” said Peter Morici, an economist at the University of Maryland. “It generally means investors are more confident in taking risks in financing mergers.”
The pairing of Kraft and Cadbury, which would rival Mars Inc. as the world’s largest candy company, follows other prominent deals in recent months, including Berkshire Hathaway Inc.’s purchase of Burlington Northern Santa Fe Corp. and Exxon Mobil Corp.’s deal for XTO Energy Inc.
And more are expected: Troubled insurer American International Group Inc., which the federal government bailed out in late 2008, is reportedly close to an agreement to sell its international life insurance unit to MetLife Inc. for as much as $15 billion, with about $9 billion of that going into federal coffers.
The amount that would be refunded to the U.S. Treasury is only a smattering of the $182.5 billion that the federal government has committed in aid to AIG, which has tentacles deep inside the world’s financial system.
It’s too early to say the M&A market has rebounded -- the total number of deals is off slightly from year-earlier levels and the value of the deals last year was half what it was in 2007 -- but the increase in action by the larger companies bodes well for the year, experts said.
One reason for the recent interest: Buyers are trying to pounce on troubled rivals at rock-bottom prices at a time when banks are more willing to finance the deals.
The M&A market slowed dramatically last year as companies and their lenders backed away from risk-taking during the financial crisis that dried up credit, especially at major banking institutions.
With the economy now gathering momentum -- and investors searching for higher returns -- companies are increasingly able to find financing.
“Everybody has a spring in their step because activity is higher and the discussions are there,” said Hector J. Cuellar, president of investment bank McGladrey Capital Markets in Costa Mesa. “It doesn’t mean you’re closing, but the opportunity to consummate a deal is there.”
The Kraft deal and the AIG talks also underscore the interest in emerging markets, where growth is expected to be strong.
Kraft covets Cadbury’s operations in India, Brazil and elsewhere, while MetLife would gain sizable foreign exposure with the AIG unit.
In the opening weeks of this year, U.S. merger activity has almost tripled to $58.6 billion from $22 billion at the same point last year, according to researcher Dealogic.
Fourth-quarter activity jumped to $228 billion from $99.5 billion in the year-earlier period.
The trend is most pronounced among larger companies.
In November, for example, there were 13 deals, topping $1 billion in value, compared with just one deal a year earlier, according to a report by Robert W. Baird & Co.
But a return to the boom levels of a few years ago remains unlikely, experts said.
The value of all mergers and acquisitions last year, for instance, fell to $790 billion from double that level in 2007.
And the number of deals in the fourth and first quarters has slipped slightly from year-earlier levels, Dealogic said.
The merger activity has helped feed the rally in the stock market as investors have pushed up the share prices of likely takeover targets.
The downside to the merger boomlet is that workers at acquired firms especially are likely to be axed -- as high unemployment continues to be a drag on the fragile economic recovery.
“Certainly, M&A is not a happy thing for employment,” said Dan Alpert, managing director at New York investment bank Westwood Capital.
Still, the willingness to do deals points to an improving economy overall, experts said. Many economists expect job growth to resume later this year, though at lackluster levels.
A months-long M&A saga drew to a close when Cadbury bowed to Kraft’s sweetened takeover bid.
The two will compete against giant Mars Inc. of McLean, Va. In 2008, Mars itself pulled off a $23-billion acquisition of William Wrigley Jr. Co.
Kraft is offering $13.78 in cash and Kraft stock for each Cadbury share. Shareholders are expected to approve the deal, which also calls for 265 million new Kraft shares to be created, by the Feb. 2 deadline.
Kraft, the Northfield, Ill., maker of Oreo cookies and Nabisco snacks, originally offered about $12.17 in cash and stock for each Cadbury share.
Cadbury, which makes Dairy Milk chocolates and Trident and Stride gum, repeatedly derided Kraft’s overtures as too low before agreeing to the latest offer.
