Merger Monday: M&A as Survival Strategy
It's been awhile since we've had a good merger Monday, and this one delivered the food industry's second biggest deal ever -- and put April on track to be the busiest month for deal-making this year.
The $23.64 billion bid for Wrigley by privately-held Mars makes April the best month for deals since December -- and the second-best month since last July. The May 2000 purchase of Bestfoods by Unilever was slightly bigger at $23.70 billion, according to Thomson Reuters.
But you could say this was also a Monday not to merge.
Look at Continental Airlines, saying it will wing it alone for now and not merge with UAL's United Airlines. UAL, though, remains in talks with US Air .
Yahoo, too, chose not to jump at Microsoft's Saturday deadline, and the standoff continues, as investors await a move by Microsoft. David Faber says that move could be a proxy battle launched by Microsoft sometime this week.
Unlike last year, it's not private equity driving these mergers and merger talks. It's all about corporate buyers, looking for strategic deals, as opposed to financial buyers looking for undervalue assets to strip and flip.
Private equity money has been sidelined, since the credit crunch bit into the ability to finance a leveraged deal.
In fact, the Wrigley deal is bigger than the total $21.6 billion total of all private equity deals in the first quarter. In that quarter, private equity was responsible for just 10.9 percent of all merger activity -- and that number is even smaller in the current quarter. That's down from a peak of $199.9 billion, or 33.7 percent of all deals, in the third quarter of 2007.
One positive from weaker private equity activity is the lack of pressure on deal prices, no doubt encouraging to some corporate buyers.
Buyers are obviously going to be "firms that are not depending on the credit markets. ...It's companies that have all the resources to side-step borrowing needs," said Rich Peterson, director of Capital Markets at Thomson Reuters.
In a note today, Tobias Levkovich, Citigroup chief U.S. strategist, points out that the change in the deal environment is likely to result in more stock deals among strategic buyers, and private equity may have to try more creative strategies than it did in the boom era, when credit was easy. For instance, he said, private equity could buy into already leveraged companies to gain influential stakes.
He also says that M&A activity has been a lead indicator for stock price performance, with a 12-month lag. He said the current low level of activity would not be a good sign for 2009 stock market performance. Citi also says deal activity is closely correlated to GDP growth and is not likely to rebound sharply, based on its economic outlook for the U.S. economy through 2009.
Levkovich says there are some areas attracting deal making, including the financials. (That would include the JPMorgan acquisition of Bear Stearns.) He also notes there is activity in the technology sector.
In April, there have been $114 billion deals announced so far, up dramatically from the $44.4 billion in March, according to Thomson Reuters. The April total is the biggest since December's $127.5 billion and the third biggest since last July's $192 billion.
Interesting in the Wrigley deal is who is joining Mars. Berkshire Hathaway CEO Warren Buffett is providing part of the financing for the deal and will receive an equity stake in the Wrigley subsidiary once the deal is completed.
Like all strategic deals in an industry, speculators are already sizing up which other candy companies may find the desire to merge as a result of the deal. Hershey is seen as a likely partner for Cadbury Schweppes , and Wall Street was betting today that this merger would help them strike a deal.
Buffett explained in an exclusive interview on CNBC that buying into Wrigley is a sure bet. At least, it's one he can understand. (For entire interview, click video below.)
"Really nothing can go wrong with something like the Wrigley or Mars brands. It's literally true that they have faced the test of time over decades and decades. People use more and more of their products everyday," he said.
Wrigley's chewing gum, Altoids mints and Life Saver candies are combining with Mars' major presence in chocolate. (Its brands include M&Ms and Snickers.) We know Buffett has been a fan of chocolate. After all, he owns See's Chocolate.
Wrigley also today reported first-quarter earnings. It said sales of $1.45 billion were up 16 percent and half of that growth came from favorable currency translation on international sales. That could also be telling you that companies that are merging are seeing big shifts in their business from macro trends, such as the appeal of an international business in a weak dollar environment.
In the case of food companies and airlines, rising costs are also at play. Buffett addressed rising commodities costs in the interview on "Squawk Box" today.
"If I knew what they were going to do, I won't have play them through stocks. I could go on the commodity market and do it. I don't know what oil or wheat or cocoa or anything like that is going to be selling for next week or next month or next year. I do know people are going to be chewing Wrigley gum and eating Mars bars," he said.
Back to the airline sector, where rivals Northwest and Delta announced plans to merge recently. There is guaranteed to be continued activity in this area, as the industry struggles with super high fuel costs and a difficult environment. The upshot for fliers will be higher fares but the industry will also be reshaped dramatically. It's easy to see why in this industry, all the buyers are strategic as the merger dance here is as much about survival as anything else.
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