GO
Loading...

Let's make a deal: Taper talk is awesome for M&A

Monday, 29 Jul 2013 | 8:57 AM ET
Oleg Prikhodko | E+ | Getty Images

The Federal Reserve's taper talk may have rattled the financial markets but it has had one notable beneficiary: Mergers and acquisitions.

An otherwise slow year for M&A got a sudden and dramatic boost after Fed Chairman Ben Bernanke said in late May that the central bank likely would begin winding down, or tapering, its $85 billion a month in asset purchases.

That chatter, in turn, set off concerns that interest rate increases weren't far behind, and ended up sparking the deal-making climate.

(Read more: Here's who Wall Street wants as the next Fed chief)

"Higher interest rates will result in lower pricing in general, but it comes down to buyers and sellers just agreeing where it's going to go," Tim Hartnett, global & U.S. private equity leader at PricewaterhouseCoopers, said in an interview. "It's a good time to own something for sale."

Are big buyouts on the horizon?
David Darst, Mogran Stanley, and Vito Sperduto, RBC, chart where stocks are headed next and take a look into the mergers and acquisition market. Darst says to "buy it on the dip, don't chase."

M&A activity had been meandering along through 2013, with the global deal total at $1.25 trillion through the first half, about on pace with its 2012 total, according to Dealogic. Second-quarter activity was the lowest in four years.

However, the first half ended with a bang.

The two-month period following Bernanke's May 22 tapering comments saw a surge of deals, worth $164 billion. That was a 59 percent gain from the $102.8 billion total from March 20 through May 21, according to the S&P Capital IQ Global Markets group.

The blistering pace continued Monday, with three big deals announced:

Hudson Bay, which owns Lord & Taylor, said it is adding luxury retailer Saks to its stable, in a deal worth $2.4 billion.

Essilor International is buying a majority stake in lens supplier Transitions Optical from PPG Industries, in a cash deal amounting to about $1.73 billion.

And generic drugmaker Perrigo is buying competitor Elan for $8.6 billion.

(Read more: Ten bets from top hedge fund managers)

Hartnett said there are plenty of building blocks in place to bolster M&A growth through the end of the year, with interest rates unlikely to be a deterrent.

"When we look at the cash on the balance sheet of corporations, it's impressive. The fundamentals are there for a pretty robust M&A market," he said. "The capital markets have been very receptive to providing the financing necessary for M&A."

Nonfinancial corporations are carrying more than $1.8 trillion on their balance sheets, according to the latest Fed data.

In addition, while rates have jumped on a relative basis, they remain low.

(Read more: US is healing ... if the Fed doesn't screw it up)

Corporate heads who participated in a recent PwC survey expressed optimism, with 75 percent saying they have a bullish dealmaking view. Nearly half said they planned to put a deal together in 2013.

"A shortage of quality assets and a growing list of willing acquirers dictate a need for confidence and greater preparation to execute, from deal strategy through integration," Martyn Curragh, PwC's U.S. deals leader, said in a statement.

"Greater competition is driving valuations and deal timelines, leaving some would-be acquirers to reflect on missed opportunities, and others with buyers' remorse for failure to capture deal value," he added.

To be sure, the road ahead for M&A will have challenges.

(Read more: 10 Things You Need to Know About the First Half)

The slow pace in recent years has been not because of a lack of resources or good financing terms, but rather because of a lack of confidence and willingness of companies to part with cash amid economic and geopolitical turmoil.

Hartnett, though, said he expects pricing to become a much bigger factor than macro concerns.

The firm expects the best deals to be available in technology, health industries, financial services and the retail and consumer sector.

"From a pricing standpoint, there are fewer good assets, or those good assets are getting a lot of looks," Hartnett said. "That's creating a lot of value for sellers and businesses."

By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.

  Price   Change %Change
SKS
---
PRGO
---
ELNCF
---
EI
---
PPG
---

Featured

NetNet TV

Wall Street