With interest rates on fixed-income securities hovering around all-time lows and a $2.03 trillion build-up of cash caused by cost cutting and market uncertainty, the mergers and acquisitions activity scene has exploded. Excluding the energy and power markets, deals throughout the first two quarters of 2010 have been scarce. Energy, on the other hand, has had a banner year with 2,050 transactions, exceeding 2007 record level by 66 deals.
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With escalated European activity in recent weeks such as GDF Suez's (GSZ.PA) $14.3 billion takeover of International Power, European M&A activity has increased by approximately 24% in the past year. Likewise, the frequency of deals in China has also surged not only on a domestic level, but on an international one as well. According to PricewaterhouseCoopers, China's "domestic and inbound M&A deal activity has rebounded strongly, reaching levels comparable to those seen at the peak before the financial crisis".
With the exception of the aforementioned regions and sectors, corporations remained fairly quiet through first half of the year. However, last week saw a 2010 record of almost $85 billion in deal value within a diverse mix of industries.
Build or Buy?
The major announcement last week was the unsolicited $39 billion bid for Potash Corp of Saskatchewan (NYSE:POT) by BHP Billiton (NYSE:BHP). Given that it takes more than five years to establish an operating mine, BHP could increase its reserves much more rapidly through a takeover than operational activities; completion of the merger would give BHP 20% of the global potash market. Since potash prices are well below their 2008-2009 highs, this could be an ideal opportunity to cheaply increase reserves before the prices begin to move up once again.
The same type of logic can be applied to the oil and gas industry. With the proliferation of horizontal drilling and various other enhanced oil recovery methods, companies may find it cheaper to acquire oil and gas fields from competitors than to undertake expensive and often risky exploration activities. With natural gas trading at only $4.12/MMBtu and oil at $73.46/barrel, the opportunity for even more energy deals in the second half of the year remains strong; perhaps even one the size of Exxon Mobil (NYSE:XOM) and XTO Energy, the largest merger in 2009.
Other notable M&A deals appeared in the technology and financial industry, both of which have been somewhat dormant through 2010. Dell (Nasdaq:DELL) will commence a tender offer for all outstanding shares of 3PAR (NYSE:PAR), a deal valued at $1.15 billion. On Monday, Dell's offer was trumped by a $1.6 billion offer from HP (NYSE:HPQ) for 3PAR. Also, Intel (Nasdaq:INTC) will purchase McAfee (NYSE:MFE) for $7.7 billion in cash. Furthermore, following the collapse of the credit markets, large banks stayed away from deals as uncertainty regarding regulations and financial quality plague the industry. Despite this, First Niagara Financial (Nasdaq:FNFG) will be moving forward with the largest financial banking merger of the past two years.
The 9.5% unemployment rate remains a thorn to the U.S economy, causing downward pressure on stock prices despite strong earnings announcements. Similar to the trend in the energy industry whereby low oil and gas prices present ideal M&A opportunity, high unemployment can serve as a catalyst for other consumer-driven sector deals. Once unemployment figures show improvement, the possibility to acquire cheap assets may disappear. (For more stock analysis, see Dependable Dividends.)
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