Private equity fuels record merger run


Storm clouds may be gathering on the horizon, but the sun is shining brightly on the mergers-and-acquisitions market.

Companies around the world struck $1.65 trillion of merger deals in the Q2, eclipsing the Q1 of 2000 as the biggest three-month total, according to data tracker Thomson Financial. That is a 90% increase from the same period in 2006, which racked up a full-year deal-making total of $3.6 trillion, the best on record. With deal volume in the Q1 of this year rising 28% to just under $1 trillion, that 2006 record would be easily shattered if the pace of the H1 of 2007 is sustained.

Is the best over?
The Q2 could end up being a high-water mark, as the flood of cheap credit that has lubricated the buyout boom shows signs of ebbing. Bond and loan investors in recent days have forced a raft of companies that are going private to pay higher interest rates and agree to more lender-friendly contract terms. If the recent bout of volatility proves to be the beginning of a more drastic reduction in the availability of credit, bankers say, the days of the record merger run could be numbered.

“We're starting to get to the point where we may not be able to sustain this breathtaking pace,” says Paul J. Taubman, the head of the global M&A group at Morgan Stanley, the No. 2 adviser on deals in terms of value after Goldman Sachs Group Inc. this year. “The M&A marketplace is going to have a meaningful correction if all of a sudden easy credit disappears.” After going into a deep freeze following corporate-governance scandals and the bursting of the technology-stock bubble early this decade, merger activity roared back in late 2003, with deals such as the $41 billion purchase of AT&T Wireless by Cingular Wireless, which is now part of AT&T Inc.

Cash for all
Besides the explosion of private-equity buyouts, the boom has been fueled by ample cash on corporate balance sheets and the rising confidence among executives that comes with increasing profits and share prices. Fittingly for a quarter in which the value of deals struck in Europe exceeded those in the US, the largest acquisitions announced in the past three months were in Europe. The biggest was the announced takeover of Dutch bank ABN Amro Holding NV by British bank Barclays PLC. That offer - valued at about $91 billion when it was announced - was later topped by a $97 billion bid by a group including Royal Bank of Scotland Group PLC.

It remains to be seen which of the two offers, both announced in April, will prevail. Next on the list was the $31 billion acquisition of Spanish electricity company Endesa SA by Italian utility Enel SpA and Spanish conglomerate Acciona. The April 2 agreement ended an 18-month takeover battle that pitted Enel and Acciona against E.ON AG of Germany and Gas Natural SDG SA of Spain. The third-biggest deal was UniCredito Italiano SpA's May 20 merger pact with rival Italian bank Capitalia SpA for nearly $30 billion.

The $25 billion club
Underscoring the contribution of private-equity firms to the M&A boom in the US were three leveraged buyouts valued at more than $25 billion each. They are the purchases of wireless-phone company Alltel Corp., student lender SLM Corp. and credit-card processor First Data Corp. According to Thomson, buyout firms accounted for 40% of US M&A activity in the quarter, the highest level ever. That is why the overall M&A market is sensitive to any interruption in easy credit. Saturday, after Thomson closed its books for the quarter, one of the largest LBOs was announced. A group led by the Ontario Teachers' Pension Plan that includes two big US private-equity firms agreed to buy Canadian telecommunications operator BCE Inc. for about $32.6 billion, excluding debt.

Amid fears that the subprime-mortgage meltdown will spill over and the near collapse of two Bear Stearns Cos. hedge funds, a number of high-yield, or junk, debt issuers have had to scrap features of their offerings that had become a hallmark of the good times for borrowers. Companies including Ahold NV's US Foodservice unit that have agreed to be acquired abandoned slices of debt offerings that were to be so-called pay-in-kind toggle notes.

The bonds can pay cash interest or not, based on the issuer's preference. Some bankers predict that such bonds are a thing of the past. “We've seen the froth come off private equity,” says H. Rodgin Cohen, chairman of New York law firm Sullivan & Cromwell LLP, which is the No. 1 law-firm adviser on deals in the H1 by total dollar value, according to Thomson. “But at the same time there are still a lot of good private-equity deals. There's no reason that should slow down. I suspect we'll see a pretty good third quarter.”

Risk of 'sentiment shift'
A “sentiment shift” among credit investors could endanger the health of the credit markets, Goldman Sachs Chief Executive Lloyd Blankfein said at a conference last week in New York sponsored by The Wall Street Journal. Some bankers say it is too early to sound alarms about the end of the buyout boom. Jimmy Elliott, co-head of global M&A at J.P. Morgan Chase & Co., says the credit-market tremors aren't enough to sap private equity's interest in buyouts.

“There would need to be a significant shift in the cost of debt to dampen the spirits of financial sponsors,” Mr. Elliott says, using bankers' parlance for private-equity firms. He said share-price declines that accompanied losses in the debt market will lessen the cost of acquisitions for private-equity firms and might offset higher borrowing costs. “I don't think we're on the way down yet,” he says. “I believe we're on a plateau.” (

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