M&A Frenzy
Here's a question I have for all the students and fans of M&A alike: Why now, and not two, three, four years ago?
How much of the process of merger and acquisition is ego driven, psychology, sentiment -- and how much of it is legitimate, intelligent strategy?
Recall that in 2001-03, there were a dearth of deals. Any buyers back then were getting bargains galore, at rock bottom prices, when the rest of the world HATED DEALS. Now, acquisitive corporate managements are paying premium prices, as profits decelerate and the economy slows.
Isn't it better to buy low and sell high?
Many of the deals we have seen have been all cash tenders; That's not like Google taking advantage of their high share price to acquire YouTube for essentially free.
Whenever we see a massive spasm of acquisitions, it makes me wonder what is it really that is driving the deals -- especially considering that these purchases could have been made for pennies on the dollar a mere three years ago. Back then rates were even lower, China was still growing at 10% year-over-year, taxes were low.
Why the rush to acquire? Is there that much cash around? I don't believe its the regulators taking a nap; There is much more to this wave than merely that.
Where are the Benjamin Graham aficianados? What say the value players?
When you see Warren Buffett talking about a $40 billion to $60 billion goal for a single purchase, spending his huge cash hoard he took decades to acquire -- despite having one of the worlds most valuable currecnies -- it makes you wonder if everyone has taken leave of their senses . . .
>
Sources:
Buffett's Quandary, M&A Case Study, Sotheby's Surge
David Wilson
Bloomberg, May 8 2007
http://www.bloomberg.com/apps/news?pid=20601039&sid=aHgKUpwhdts8&
As Deal Barriers Fall, Takeover Bids Multiply
Regulators and Size Pose Less of a Problem;
'Nobody Is Off Limits'
DENNIS K. BERMAN in New York, JASON SINGER in London and JOHN R. WILKE in Washington
May 8, 2007; Page A1
http://online.wsj.com/article/SB117858664134395253.html
Tuesday, May 08, 2007 | 07:22 AM | Permalink
| Comments (60)
| TrackBack (1)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00d8350121ed53ef
Listed below are links to weblogs that reference M&A Frenzy:
» The Big Picture | M from The Capitalist Resistance
Link: The Big Picture | MA Frenzy. Barry Ritholtz comments on the wave of MA activity [Read More]
Tracked on May 8, 2007 5:13:28 PM
Comments
Mittal is in talks to buy my AKS for $4.5 billion, or $40 a share.
Posted by: V L | May 8, 2007 7:28:42 AM
They are not crazy. They simply do not have any better ideas about what to do with their cash. There is just too much cash.
Posted by: V L | May 8, 2007 7:38:10 AM
It's a safer bet to try to acquire companies when everyone else is trying to do it. These guys have a herd mentality and money is free.
Posted by: lloyd | May 8, 2007 7:43:14 AM
It is human greed and psychology. They want to have their toys and they afraid that somebody else will snap it before them; therefore, they do not mind paying more. It is similar to people overpaying for a rare painting – so they can have it but nobody else.
Posted by: V L | May 8, 2007 7:56:32 AM
I agree with V L, I think it's a combination of having cash to burn, banks freely lending and in the case of all the LBO's a lot of money in the market chasing a relatively small number of decent investments.
Posted by: GP | May 8, 2007 7:57:23 AM
A big part of it, if I understand correctly, is the demand for bonds (commercial paper).
Many pensions, insurance companies, etc. were burned holding too much equity in the bear market, so now they have mandates for how much of their assets have to be in bonds (and for many, the "how much" is 100%).
If you had very high demand for bonds but couldn't find anything to do with that bond money (e.g., businesses to run, businesses to start, capital to invest in, etc.) you could easily fall into the current logic...
If I have demonstrable demand for bonds, but can only buy equities easily, why not turn water into wine and buyout equities and turn them into bonds?
Posted by: Jason G. | May 8, 2007 7:59:11 AM
Oh, and when the demand for bonds is completely un-fazed by poor economics on any particular position, it simply allows worse and worse deals.
If I'm institutionally bound by regulation to invest other people's money in bonds, do I really care what the rate is, or do I care about being fully invested and earning my bonus?
Posted by: Jason G. | May 8, 2007 8:01:12 AM
If i recall correctly, all academic studies show that surges in M&A activity are signs of a top, not a bottom.
The misconception is that because private equity firms are the buyers this time, not entrenched corporate management, it will work out fine because the private equity people are smarter. I see no reason to believe that they are any more immune to the herd mentality than anyone else.
When cycles are at one extreme or the other, it is simply hard for humans to forecast change. At bottoms, no one wants to take risk. At tops, no one prices risk correctly.
I have no idea when, but it will happen in this cycle too.
Posted by: Jay Weinstein | May 8, 2007 8:14:21 AM
Given the track record that Warren Buffett has compiled on behalf of myself and other Berkshire Hathaway shareholders, I find it amusing in the extreme for anybody to suggest he's "taken leave of his senses." When it comes to investing we should all wish that were were as insane as the Oracle of Omaha.
~~~
BR: Anyone with a 3rd grade reading comprehension understands that statement is hyperbole about M&A in general, and not a sleight about Buffett. The embedded link is about his prior acquisitions and his skepticism of the M&A boom.
This is why people do not like lawyers.
Posted by: Nova Law | May 8, 2007 8:26:09 AM
psychology, sentiment...
Just look at some of the "whoppers" getting $ thrown at them;
MS gonna buy Yahoo...oops
IBM gonna layoff 150,000...
BHP "no Problem" bidding $100 bil for Rio Tinto...
Isn't kinda unusual for AA to be up on the deal if they're issuing stock?
Posted by: tjofpa | May 8, 2007 8:30:48 AM
Jay,
Please recall harder. I'd love to do a bit of reading on the subject.
Posted by: kharris | May 8, 2007 8:40:00 AM
Buffet said he was "looking for" a big acquisition; he quickly qualified that statement by adding the he currently could not find anything at a fair price.
The Oracle has to put all that moneypile to work somehow, and he implied that he does NOT want to keep it sitting in US dollars or Treasuries.
My guess is he either a) doesn't buy anything until a market pull-back, or b) buys a hard asset, or c) acquires a company that collects revenue in something other than US dollars.
Pins and needles...
Posted by: grodge | May 8, 2007 8:45:26 AM
I have to agree with grodge. Buffett is in a tough spot...he is sitting on loads of cash, knows the dollar is depreciating, and needs to have that money making money.
My bet is that he invests outside the US. Maybe a foreign commodities co.?
Posted by: LAWMAN | May 8, 2007 9:04:50 AM
I see it as a perfect storm of several factors:
SARBOX has had a double-barreled effect. First, the higher costs and administration of regulatory compliance is driving corporations to join together to lessen the impact. Second, the fallout from making corporate risk-taking borderline criminal is that corporate boards stopped taking risks. They took their balance sheets from one extreme to another. Private managers can now come in, buy these clean, cash heavy balance sheets, and immediately pull all their money out by leveraging the thing to the hilt.
The cycle of private equity is a big factor. PE boomed in the late 1990s and a lot of cash was raised into the early 2000s. Unfortunately, the deflation of 1997-2002 and its resulting recession and tech meltdown meant a lot of that money went uninvested. With hard timelines for PE funds to draw capital from investors, it is lijely that PE managers from 2002 & 2003 vintage funds are rushing to put money to work (they can only charge fees on capital drawn and often have a 5 year window to draw it).
Finally, I think the expansion of the view of PE as a separate asset class has influenced institutional and HNW individual investors alike.
Posted by: REW | May 8, 2007 9:08:05 AM
As a speculator working in very short (days to weeks) time frames does it do us any good by looking at what the Oracle of Omaha, Mr. Warren Buffett, has been doing in the markets recently. Two recent events, a large railroad buy and forshadowing parameters of his next big (40-60 billion) deal have colored pages of the bulls play book and have scarred some of the bears into believing if Buffett's buying this market, why would we ever stay out of it?
To me as a speculator, Mr. Buffett's long term investing thesis holds absolutely no sway over how I trade the markets on a short term time horizon. I could not think of a more obtuse comparison to focus as a speculator. The ONLY thing I have postulated is that the DJIA transportation average ($TRAN) was definitely propped up by his railroad purchase a few weeks ago and without that catalyst it would probably not be confirming the dow theory buy signal triggered in late April. However, we could say the same thing about the utility index being propped up the KKR buyout of TXU and furthermore, the DJIA being propped up by buyout rumors/mania not fundamentals.
Posted by: erik | May 8, 2007 9:11:20 AM
Iscar which he has just bought is an Israeli company, so he is looking outside the USA.
Posted by: Big Al | May 8, 2007 9:19:40 AM
It started with the US Dollar Repatriation Act, which started a huge inflow of $$ to corporate balance sheets. It came with a mandate -- spend it.
Add a weak dollar which (finally) made our exports more competitive. (profits up)
Add compressing PE's (cheaper vs earnings)
Add cheap capital and tight spreads
Add motivated stock holders - underperformance of shares.
All these factors helped in making this trend so popular now.
Posted by: Fred | May 8, 2007 9:33:52 AM
It is the last great way to get rich before the crash. We talk of entities (Blackstone, etc.) but the actions are taken by people. If you are financially astute and things look to be ready to turn to crap, once some trigger happens, and you have the ability to do so, why not do whatever to make some fat money?
I'm not saying it is a good idea but people seem to be suffering from the ever increasing overhang of uncertainty in the world. Humans don't handle uncertainty and they hate to lose. So they are taking actions to have one more win. You can believe that this is not a good sign.
Drinking and then driving is not a good idea but try to tell that to a drunk. By the way, Microsoft isn't going to buy Yahoo and Warren Buffet isn't going to pay the wrong price for a company. He's researching now because sometime soon he may be able to pick up a company for pennies on the dollar. I'm looking at the housing market now because at some point I'm going to get a house for a much lower price if I have prepared correctly.
Posted by: Richard Hanley | May 8, 2007 9:34:16 AM
Warren Buffett.."spending his huge cash hoard he took decades to acquire"
DECADES ?!? No not really.
Operating Cash Flow (ttm): 10.20B
http://finance.yahoo.com/q/ks?s=BRK-A
Posted by: DecidedBear | May 8, 2007 9:35:01 AM
I don't suppose that it ever occured to these companies with all of this cash...that they COULD return it the shareholders in the form of dividends? Guess not.
Instead they choose to burn it by making expensive and unnecessary purchases. It's been noted in several surveys of company executives that a economic slowdown is looming...yet they make needless acquisitions?
I suppose they have nothing to fear anyhow, people just keep buying the stock. I am defintely missing something.
Posted by: KP | May 8, 2007 9:40:33 AM
cash flow yields are higher than borrowed money rates. combined with the the greenspan put on the economy and its a sure bet.....
Posted by: fatMary | May 8, 2007 9:41:24 AM
It's all like everyone is trying to get rid of money, probably expecting that the value of money should decline.
Posted by: theroxylandr | May 8, 2007 9:41:26 AM
I was told MZM increased ~10.2% YoY... if this is correct, I think the PE frenzy is more a result of "free" money burning a hole in PE's pants. Buffett will not overpay. He does make mistakes (like not selling KO about 10 years ago and even he admits it was a mistake), but I don't think he will make a $40 Billion mistake.
I am curious what the company in South Africa may be. SSL?
Posted by: Chad | May 8, 2007 9:45:30 AM
Just about everyone has a point. REW has a skewer. The bubble is still expanding and this type of behavior is typical endstage. Can you imagine what happens when the contraction begins and these enterprises are thrown to the Chainsaw Al types. Oh, I forgot...no more contractions.
Posted by: zell | May 8, 2007 9:48:29 AM
Would the USA or Wall Street nationalize to redistribute? Doubtful. To distressful. To time consuming.
IMO Entities are hoarding and aquiring to survive the Parker Brothers Monopoly game enabled by the money supply and growth of share price inflated book value. Outflank the Wal-Mart for fun and to own the most barcodes.
Why now? There is a line in Conan I, "do ya wanna live forwever", answer ... Ya - but with flair. Its the culture.
Finally, I wonder if the job of managing all these assets could get incredibly difficult with a couple imaginable catastrophies?
Are the rules of Monopoly flawed? Sorry Chutes & Ladders Life.
Posted by: Greg0658 | May 8, 2007 9:56:54 AM
