All aboard the M&A express

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Man of steel: Lakshmi Mittal’s US$34bn Arcelor takeover was one of the most high-profile mergers of 2006.

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Cash cow: Telcos are not exempt from corporate mergers, with Vodafone and other companies tabling aggressive bids to acquire Hutchinson Essar.

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Done deal: Tata Steel chairman Ratan Tata (left) was all smiles after announcing the US$8.1bn merger with Corus.

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The gap between Christmas and the New Year used to be a dead zone for business. Most deals were sewn up before the festivities, leaving captains of industry to digest their turkey in peace. It was rather a cosy arrangement.

How things have changed. This year has been a record one for mergers and acquisitions (M&A) — the best since 2000 at the peak of the dotcom madness. And it’s not over yet. These days bids can come at any time and from anywhere.

Before the New Year had even been rung in at the London Stock Exchange, chief executive Clara Furse was still busy seeing off an unwanted advance from Nasdaq, the American exchange. At Corus, formerly British Steel, Philippe Varin was weighing up competing bids from India’s Tata Steel and Brazil’s CSN that value the group at close to US$9.85bn. In India, Vodafone and a plethora of cash-rich venture capitalists are chasing the subcontinent’s Hutchison Essar.

Across the world, low interest rates, the pressures of globalisation and the advent of ever-bigger private-equity funds have spurred a huge number of takeovers. Bankers and lawyers are predicting that 2007 will be just as momentous as this year.

The M&A market rises and falls with the economy, but 2006 exposed some fundamental shifts. One is an unprecedented rise in hostility. Never before have so many institutions and investors been prepared to go hostile in pursuit of their targets. It’s an increasingly nasty world out there for embattled chief executives.

According to figures compiled by Thomson Financial, in 2006 worldwide M&A activity reached a record US$3,760bn compared with US$3,400bn in 2000. Of those mergers and acquisitions, just 19 were ‘hostile’ in the old sense of the word — a full on bid for a company that does not want to be acquired. But companies also received 110 uninvited bids worth US$351bn, the highest number since 2000, when 129 offers worth US$117bn were launched.

Most venture capitalists and major banks such as Goldman Sachs once avoided hostile bids, wanting managements’ approval for any offer they made. Not any more. With billions raised in takeover funds and their rivals all pursuing the same deals, they can no longer afford to be so scrupulous. It’s a strategy that has paid off handsomely for Goldman, which this year earned record profits for its shareholders and record bonuses for its bankers.

Just as business is increasingly global, so is the rise in hostility. Hostile bids were once rare in mainland Europe, where government ownership, powerful unions and a chummy business culture precluded what French president Jacques Chirac once dismissed as Anglo-Saxon attitudes. Now they are increasingly common.

In Sweden, the truck maker Scania is fighting off a bid by German rival Man. Scania’s chief executive Leif Ostling even went as far as to liken it to Hitler’s wartime tactics, saying the Germans were experts of blitzkrieg but that in the long run they usually lost the war. He went on to question the “social intelligence” of Man boss Hakan Samuelsson and said German firms show no respect for small countries like Sweden.

Morton Pierce has chaired the M&A group at the New York law firm of Dewey Ballantine since 1991. With lawyers across Europe and America, he has seen first-hand how radically the M&A market has changed. “20 years ago you would look at someone who said they wanted to go hostile and ask ‘are you sure?’” Back then, he said, hostile bids were the preserve of corporate raiders and happened mainly in America. Now everyone is at it. “For better or worse it’s one of the business practices that the US seems to have exported,” said Pierce.

There are many factors behind the global rise in hostile and unsolicited bids. The state sector has been in decline in Europe and other parts of the world since the privatisations of the 1980s and 1990s, a trend that started in Britain. The sheer number of listed public companies has also increased.

In Europe there is also a new generation at the top of business and it is fighting the Continent’s resistance to Anglo-American business attitudes.

And behind all that there is globalisation. Companies from Russia, Brazil, India and China are now global players and looking for acquisitions.

The biggest opportunities and the threats to a business are not necessarily found in its local market. Indian-born and London-based billionaire Lakshmi Mittal built his Dutch-listed Mittal Steel into the world’s biggest steel company by snapping up ageing mills in places like Kazakhstan and Poland before negotiating the US$4.5bn purchase of International Steel Group from the American investor Wilbur Ross in 2004.

Mittal masterminded one of the most audacious takeovers of 2006 with the US$34bn purchase of rival Arcelor. He said the deal has set industrialists across the world thinking about a new round of consolidation. “Nobody thought there could be a merger between the number one and number two in an industry — in the past consolidation has normally been lower down — the number three with the number six, or number two and number five. I think this deal has created a lot of discussion in boardrooms — not just in steel companies, but in all industrial companies — about the future.”

Like Mittal, Simon Robey, chairman of worldwide M&A at Morgan Stanley, expects even more deals in the year ahead.

“Corus is being competed for by Brazilian and Indian companies — that is remarkable. It would not have happened 18 months ago. The world is changing and that augurs well for M&A. I think it will be across the board. The market is not being driven by companies that are snapping up bargains. It is being driven by people looking for assets that are strategically and financially sensible for them. It is not opportunistic — it is well thought out.”

Robey says he feels “more bullish going into a new year than I can remember”. He adds: “Of course there have been fears of geopolitical risks, rising interest rates and concerns about a slowdown in the global economy, but I think the outlook is robust. If you were a betting man you would see the boom times continuing as far as you can see out.”

But what goes up must eventually come down and bankers do see clouds on the horizon. With so much money chasing deals someone is going to overpay and once that is exposed it may knock the wind out of the merger market. But unlike the last M&A boom that was fuelled by technology, media and telecoms companies, this one cuts across all sectors. A disaster in one sector may not have the same impact as it did last time.

Problems in the private-equity world, a hedge-fund collapse or a major decline in markets are probably more realistic threats. They “could cause people to reappraise the whole risk structure of the markets”, says Robey. “But it is hard to see a catastrophe happening or even one or two things that could take the wind out of the sails of the market.”

And for those companies being targeted, it is increasingly difficult to hold out against the wall of money. The demands of corporate governance have forced boards to jettison many of the defences that once held off potential predators.

In 2006 only 118 companies adopted so-called ‘poison pill’ defences, compared with 234 on average every year in the 1990s, according to Thomson. “People used to say that if you had enough defences, you could never be taken over,” says Pierce. “Today it’s a function of price.”

Many of today’s acquirers are unable to launch old-style hostile bids, says Roger Aylard, head of UK investment banking at Deutsche Bank. “The vast majority of takeover activity is dependent on high levels of leverage and lenders will not lend that amount of money without due diligence — and you can’t get due diligence without management support.”

But the hostility facing takeover companies now often comes from within, he adds, with shareholders pressing boards to consider bids for short-term financial gains that other shareholders and board members want to reject, believing that they have a better strategy for the long run.

Sometimes management is right to hold out against the pressure, says Aylard. “Look at Marks & Spencer. I think a lot of people thought that management should have caved in to Sir Philip Green’s bid and they didn’t. Now look how well they have done.” M&S saw off Green’s hostile bid in 2004 after a number of difficult years and boardroom spats. It has since gone on to shine and now seems an unlikely takeover target.

Other big British firms have been less fortunate. EMI has received a number of unsolicited bids, most recently from Warner Music and the venture-capital firm Permira. In both cases, talks collapsed and EMI’s share price fell with it.

In 2006, hostile deals worth US$30.3bn were launched against British companies only to be withdrawn. In the previous year, the figure was US$4.4bn, according to Thomson.

This year, many bankers and venture capitalists are predicting that a number of FTSE 100 companies could be on the receiving end of bids that may or may not come off. The loss of time, money and morale involved in assessing these phantom bids is considerable.

“There is an increasing caution among UK plc boards about letting private-equity firms start the process because you have no guarantee that they are going to complete it,” said one senior banker.

But for as long as the money is on the table, they have little choice. Never before has so much money chased so many deals. Private-equity firms are estimated to have amassed US$2,000bn in buying power.

Texas Pacific was the world’s most prolific buyout group in 2006, notching up 17 purchases valued in total at just over US$101bn. Its high-profile deals included the Las Vegas casino giant Harrah’s and Univision, America’s Spanish-language broadcaster. An approach has also been made to Australia’s Qantas airline.

Late last year Goldman Sachs, the biggest American securities firm by market value, announced it had raised US$6.5bn for a fund to invest in toll roads, airports and other infrastructure deals. Private equity now dominates the M&A market and the firms are increasingly prepared to take their offer straight to shareholders if management rejects it. In Britain this year BAA, the London Stock Exchange, EMI and ITV were all subject to unsolicited bids.

The size of deals that private equity firms are prepared to take on is getting ever bigger. Blackstone last month agreed to pay US$36bn for America’s Equity Office Properties. If completed, the deal would be the world’s largest buyout, eclipsing the US$33bn buyout of the American healthcare company HCA, also completed in November.

Last year’s giant buyout deals broke a record that had stood since 1988 when Kohlberg Kravis Roberts bought RJR Nabisco for US$30.6bn — a deal made famous by the book and film ‘Barbarians at the Gate’.
In 2006 the bid targets have stretched across all sectors from the steel industry and trucking to music and chicken processing. But the biggest deals have been in property and healthcare.

Bankers expect the M&A boom to continue in 2007, fuelled by cheap finance and the huge funds raised by the private equity firms.

Copyright The Sunday Times 2006.

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