The Merger Tsunami Breaks
The merger tidal wave that kept building through the 1990s seems to finally have broken, due to a slowing global economy and the uncertainty surrounding terrorist events. Although this gives managers a breather from the frenzy of mergers, it creates problems of its own, such as the human resource headaches that sometimes go with broken deals.
Twenty mergers and acquisitions (M&As) worth more than $13 billion were abandoned in the two weeks following September 11, costing investment banks about $130 million in fees, according to Money magazine. Dealmakers are struggling to keep the M&A pipeline flowing, but the times seem too uncertain to tempt many CEOs. M&A volume in the period between September 11 and October 11 was down 55.9% compared with the same period in 2000, according to Thomson Financial.
An M&A slowdown was apparent even before the terrorist attacks. The dollar value of cross-border M&As grew tenfold in the 1990s, from $85 billion in 1991 to $850 billion in 1999, according to a Morgan Stanley Dean Witter analysis of data compiled by the United Nations. But the M&A trend was waning by the second half of 2000. Then, during the first half of 2001, the value of global M&A deals dropped by more than 50% compared with the first half of 2000. In raw numbers, there were about 15,000 global M&As in the first half of 2001, compared to more than 20,000 during the same six months in 2000, a 25% decrease.
Within the U.S., there were obvious signs of a merger slowdown, too. During the first six months of 2001, $380.1 billion in announced U.S. M&A deals were reported; by way of comparison, more than $886 billion took place during the first six months of 2000. The value of U.S. mergers during June 2001 was the lowest amount reported since September 1998.
So what's the forecast for mergers? Futures remain unclear as the global economy cools and stock prices fall. "If anyone thinks they know the answer right now, they're bluffing," says Stephen Wolitzer, head of M&As at Lehman Brothers. For now, most firms are turning inward, pausing for reflection as if they were holding their breath, waiting to see what happens next. "I don't think people are thinking long term," says Jerry J. Jasinowski, president of the National Association of Manufacturers. "They're thinking short term."
Even many of the firms that already had announced a merger or acquisition are having second thoughts and consulting with lawyers on ways to wiggle out of the deals. They comb through contracts, looking for loopholes and clauses that refer to adverse changes in the businesses that they were about to buy so that they have legal grounds for release.
Of course, deals that fall apart can present major retention headaches for HR professionals. The failure of a merger that's been made public can lead many employees to walk out the door, according to David Rhodes, who runs the financial-services practice at the Boston Consulting Group in London. That's because an abandoned acquisition often puts a target company into play.
Even those companies that do want to go forward with planned deals are finding that their sources of funding are drying up. "We have seen a precipitous drop in new loans since September 11," says Bram Smith, head of global lending at Morgan Stanley. "In fact, there are almost zero new deals getting done."
Yet, for every trend there's a countertrend, and some business people think this economic downturn could net some bargains, as stock prices fall and shaky firms flounder. The temptation to take advantage of this "fire sale" market by acquiring firms at minimal cost may be too much for some firms to pass up, so some financial analysts are revising their initial pessimistic forecasts about the future of M&As. M&A activity, although relatively slow, could increase, they say. In fact, Hal Ritch, head of M&As at Citigroup's Salomon Smith Barney, is downright optimistic about the future of M&As. He is advising his clients to wait a few weeks "to get their sea legs." But with stock prices so low, he says, some CEOs are looking at potential targets and thinking, "If it didn't seem unpatriotic I'd go hostile." The truth is that unsolicited bids represented a growing percentage of the value of all M&As in the first part of 2001. If companies start feeling more certain about the future, unsolicited bids could become an important feature of the next wave of merger deals.
====================================================
Financial data on M&As can be found in the following sources:
Mergerstat
Thomson Financial
The following articles were used to help write this TrendWatcher:
Abelson, Reed. "In a Chorus of Caution, Some Still Chant Boldness." New York Times, October 7, 2001, p. BU4.
Atlas, Riva D. "Lending Slows, Forcing Delays of Some Deals." New York Times, October 9, 2001, pp. C1, C14.
Birger, Jon. "Sudden Impact: Adding Up the Economic Cost of September 11 Sector by Sector." Money. Business NewsBank. November 1, 2001, p. 84.
Cecil, Mark. "Sign of the Times: Would-Be Sellers Lie Low." Mergers & Acquisitions Report. IAC Business Index. October 8, 2001.
Fowler, Tom. "Compaq's Loss Not as Painful as Predicted." Houston Chronicle. Business NewsBank. October 24, 2001, p. 4.
Goldberg, Steven T. "This Way Up." Kiplinger's Personal Finance. Business NewsBank. November 1, 2001.
Hoogesteger, John. "Changing Strategy: Financial Professionals Try to Adapt to an Uncertain Future." City Business: The Business Journal of the Twin Cities [Minneapolis]. Business NewsBank, October 12, 2001.
Kapner, Suzanne. "Britain: Advertiser Favors Merger." New York Times, October 18, 2001, p. W1.
"M&A: No Visibility Here." Investment Dealers' Digest. IAC Business Index. October 1, 2001.
Sapsford, Jathon, Susanne Craig and Nikhil Deogun. "Attacks Derailed Keefe-BNP Talks." Wall Street Journal, October 10, 2001, pp. C1-C2.
Seitz, Patrick. "Computer Makers: Compaq Bad News Renews Questions About HP Marriage." Investor's Business Daily. Business NewsBank. October 3, 2001.
"Wait and See." The Economist, September 29, 2001, p. 64.
Twenty mergers and acquisitions (M&As) worth more than $13 billion were abandoned in the two weeks following September 11, costing investment banks about $130 million in fees, according to Money magazine. Dealmakers are struggling to keep the M&A pipeline flowing, but the times seem too uncertain to tempt many CEOs. M&A volume in the period between September 11 and October 11 was down 55.9% compared with the same period in 2000, according to Thomson Financial.
An M&A slowdown was apparent even before the terrorist attacks. The dollar value of cross-border M&As grew tenfold in the 1990s, from $85 billion in 1991 to $850 billion in 1999, according to a Morgan Stanley Dean Witter analysis of data compiled by the United Nations. But the M&A trend was waning by the second half of 2000. Then, during the first half of 2001, the value of global M&A deals dropped by more than 50% compared with the first half of 2000. In raw numbers, there were about 15,000 global M&As in the first half of 2001, compared to more than 20,000 during the same six months in 2000, a 25% decrease.
Within the U.S., there were obvious signs of a merger slowdown, too. During the first six months of 2001, $380.1 billion in announced U.S. M&A deals were reported; by way of comparison, more than $886 billion took place during the first six months of 2000. The value of U.S. mergers during June 2001 was the lowest amount reported since September 1998.
So what's the forecast for mergers? Futures remain unclear as the global economy cools and stock prices fall. "If anyone thinks they know the answer right now, they're bluffing," says Stephen Wolitzer, head of M&As at Lehman Brothers. For now, most firms are turning inward, pausing for reflection as if they were holding their breath, waiting to see what happens next. "I don't think people are thinking long term," says Jerry J. Jasinowski, president of the National Association of Manufacturers. "They're thinking short term."
Even many of the firms that already had announced a merger or acquisition are having second thoughts and consulting with lawyers on ways to wiggle out of the deals. They comb through contracts, looking for loopholes and clauses that refer to adverse changes in the businesses that they were about to buy so that they have legal grounds for release.
Of course, deals that fall apart can present major retention headaches for HR professionals. The failure of a merger that's been made public can lead many employees to walk out the door, according to David Rhodes, who runs the financial-services practice at the Boston Consulting Group in London. That's because an abandoned acquisition often puts a target company into play.
Even those companies that do want to go forward with planned deals are finding that their sources of funding are drying up. "We have seen a precipitous drop in new loans since September 11," says Bram Smith, head of global lending at Morgan Stanley. "In fact, there are almost zero new deals getting done."
Yet, for every trend there's a countertrend, and some business people think this economic downturn could net some bargains, as stock prices fall and shaky firms flounder. The temptation to take advantage of this "fire sale" market by acquiring firms at minimal cost may be too much for some firms to pass up, so some financial analysts are revising their initial pessimistic forecasts about the future of M&As. M&A activity, although relatively slow, could increase, they say. In fact, Hal Ritch, head of M&As at Citigroup's Salomon Smith Barney, is downright optimistic about the future of M&As. He is advising his clients to wait a few weeks "to get their sea legs." But with stock prices so low, he says, some CEOs are looking at potential targets and thinking, "If it didn't seem unpatriotic I'd go hostile." The truth is that unsolicited bids represented a growing percentage of the value of all M&As in the first part of 2001. If companies start feeling more certain about the future, unsolicited bids could become an important feature of the next wave of merger deals.
====================================================
Financial data on M&As can be found in the following sources:
Mergerstat
Thomson Financial
The following articles were used to help write this TrendWatcher:
Abelson, Reed. "In a Chorus of Caution, Some Still Chant Boldness." New York Times, October 7, 2001, p. BU4.
Atlas, Riva D. "Lending Slows, Forcing Delays of Some Deals." New York Times, October 9, 2001, pp. C1, C14.
Birger, Jon. "Sudden Impact: Adding Up the Economic Cost of September 11 Sector by Sector." Money. Business NewsBank. November 1, 2001, p. 84.
Cecil, Mark. "Sign of the Times: Would-Be Sellers Lie Low." Mergers & Acquisitions Report. IAC Business Index. October 8, 2001.
Fowler, Tom. "Compaq's Loss Not as Painful as Predicted." Houston Chronicle. Business NewsBank. October 24, 2001, p. 4.
Goldberg, Steven T. "This Way Up." Kiplinger's Personal Finance. Business NewsBank. November 1, 2001.
Hoogesteger, John. "Changing Strategy: Financial Professionals Try to Adapt to an Uncertain Future." City Business: The Business Journal of the Twin Cities [Minneapolis]. Business NewsBank, October 12, 2001.
Kapner, Suzanne. "Britain: Advertiser Favors Merger." New York Times, October 18, 2001, p. W1.
"M&A: No Visibility Here." Investment Dealers' Digest. IAC Business Index. October 1, 2001.
Sapsford, Jathon, Susanne Craig and Nikhil Deogun. "Attacks Derailed Keefe-BNP Talks." Wall Street Journal, October 10, 2001, pp. C1-C2.
Seitz, Patrick. "Computer Makers: Compaq Bad News Renews Questions About HP Marriage." Investor's Business Daily. Business NewsBank. October 3, 2001.
"Wait and See." The Economist, September 29, 2001, p. 64.