Record year seen for mergers
NEW YORK — The corporate mergers and acquisitions business has been so strong during the first two months of 2006 that investment bankers are predicting a record year for deals.
The year has already brought Boston Scientific Corp.’s $27.2 billion acquisition of Guidant Corp. and The Walt Disney Co.’s $7.4 billion purchase of Pixar Animation Studios Inc.
Analysts attribute the increase in deals in part to heightened activism among investors such as hedge funds that are pushing companies to sell off unprofitable business units. Another factor is the long-held belief that buying a competitor is the fastest way to expand a company.
“It is easier to buy something than build it from scratch,” said Andrea Pericli a portfolio manager with Euclid Financial Group, a Washington, D.C.-based hedge fund.
During the first eight weeks of the year, 4,037 deals worth $473 billion were announced, compared with 4,971 totaling $378 billion in early 2005, according to Thomson Financial, a business information company that tracks merger activity. That’s the second most active start for Wall Street since early 2000, when AOL bought Time Warner in a deal then worth $182 billion and there were 6,061 transactions worth $728 billion.
Last year, bankers put together $2.7 trillion worth of announced mergers and acquisitions or about 32,900 deals, far above the 31,300 worth $1.96 trillion announced in 2004, Thomson Financial said.
The record for mergers was set in 2000, during the high-tech bubble, when bankers assembled 38,468 deals worth $3.6 trillion.
“We’re very optimistic about 2006. The trends driving the markets all seem to have a fair amount of wind at their back,” said Michael Boublik, a senior mergers and acquisitions investment banker at Morgan Stanley.
One of the more notable deals so far this year was Boston Scientific’s bid for Guidant. Boston Scientific beat out Johnson & Johnson for the medical device maker during a two-month bidding war that illustrates companies’ drive to buy other businesses as a way to increase earnings. Boston Scientific saw Guidant as an opening to the $10.3 billion cardiac device market.
Home Depot Inc.’s purchase of Hughes Supply Co., meanwhile, doubled its presence in a $410 billion market focused on business customers such as homebuilders, professional contractors and municipalities. And Disney snapped up Pixar — the studio behind hits like “Toy Story” and “Monsters Inc.” — to help bolster its library of animated characters that could find their way into theme parks.
“Disney significantly enhances the quality of its film slate,” a Merrill Lynch & Co. report said, adding that the deal allows Disney to regain its position “as the leader in animated films.”
But many of this year’s mergers may result from increased activism by investors such as hedge funds and private equity funds.
Hedge funds, investment vehicles for the wealthy, and private equity funds that manage money for endowments and pensions are always sifting through the marketplace for undervalued or overlooked companies. Managers of both types of funds are under enormous pressure to produce generous returns for their investors; if they own stock in a company that’s underperforming in some way, they’ll agitate for a sale of all or part of the company’s assets.
That’s also the strategy of billionaire financier Carl Icahn, who recently pushed Time Warner Inc. management to improve the company’s worth by splitting it up into four separate businesses.
There are about 8,000 hedge funds worldwide controlling about $1 trillion in assets and their annual returns dropped from double digit levels just a few years ago to between 6 percent and 8 percent last year, according to Jim Stynes, head of mergers and acquisitions at Deutsche Bank.
“They (hedge funds) have found that being activist will help them get more returns,” Stynes said.
This year is likely to see a continuation of the trend toward private equity funds and other investors banding together to bid on a company.