WSJ: July Mergers: Time for Bottom-Feeding? (1 Aug 2008)

From the past observations, M&A activities may increase during the market slumps where weaker players are taken over by or merged with the stronger ones to form even stronger entities. E.g. are during the Asia Currency Crisis where many banks were merged together.

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July Mergers: Time for Bottom-Feeding?
Posted by Stephen Grocer

The past 12 months have been tough for deal makers on these shores. Not only has the U.S. been perhaps the hardest hit region globally, but the credit crunch keeps going, and going, and going, and M&A departments up and down the Street have been in layoff mode.

With that in mind, Deal Journal has one question before we dive into our end-of-the-month M&A check up: Do you want the good news first, or the bad news?

The good news: U.S. deal volume hit its highest monthly total last month since July 2007. Companies and private-equity firms announced $179.1 billion of transactions in the U.S. last month, more than were struck in the first quarter, according to Dealogic. The average size of acquisitions by corporate buyers reached $705.1 million, the highest since at least 2007.

The bad news: The foreigners are coming. In the past two months, more than 40% of U.S. deal volume reflects overseas companies acquiring U.S. targets, according to Dealogic. The value of such deals topped $70 billion in July for a second consecutive month. Before June, the monthly high in the past two years was the $62.6 billion of December 2007, when banks were lining up for capital infusions.

Of course, on the face of it, acquisitions of U.S. companies by foreign buyers isn’t bad news–though that may depend on your perspective. Rather, it is the reason for the increase: U.S. companies are cheap. The combination of a weak dollar and tumbling share prices have made U.S. companies too attractive to pass up. And that doesn’t bode well for a sustained rebound in deal making. Instead it suggests foreign companies are bottom feeding, and that the buying could end when the present conditions are in the rear-view mirror (though perhaps a positive suggesting the bottom is being hit now).

Here are some more interesting numbers from the data Dealogic sent over:

- World-wide M&A volume hit $437 billion, building on June’s strong jump in activity.

- Year-to-date deal volume stands at $2.1 trillion, down 29% from the year-earlier period. The volume of acquisitions by strategic, or corporate, buyers is off just 16% through July 31, while private-equity buyout volume is down 74%.
- The average size of a strategic deal was $230.6 million, the highest since the $285 million of April 2007.
- There hasn’t been a leveraged buyout of $10 billion or more in the U.S. since July 2007.
- European M&A volume hit $167 billion, the highest total since November 2007–that was the month BHP Billiton’s bid for Rio Tinto was announced.
- Deal volume in Asia fell from its high of $105.8 billion in June to $40.5 billion in July – its lowest total since January 2007.
- PE buyout volume is Asia is down just 11% through July 31.