Investor Agenda

M&A: Only the Beginning?


Last week’s burst of M&A activity — and its continuation to start this week — suddenly made the often-quiet end of August a lot more interesting:

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BHP Billiton, the world’s largest miner, put $40 billion on the table in a hostile bid to take over Potash, the world’s largest fertilizer producer, only to be rejected by the board. Intel, the world’s biggest chip maker, is buying McAfee, one of the world’s biggest security technology companies, for nearly $8 billion. That works out to $48 per share, a whopping 60% over MFE’s closing price the day before the announcement. It’s also worth noting this is Intel’s largest acquisition ever. Dell said last week it would pay $1.3 billion for 3PAR, a data storage company. Today, Hewlett-Packard, upped the ante to $1.6 billion. Rank Group, the parent company of Reynolds Wrap, is shelling out about $4.4 billion to buy Pactiv, the maker of Hefty trash bags.

That’s a lot in a short period of time, but I’ve told my readers before to be on the lookout for more mergers and acquisitions. Conditions are ripe: Organic growth is hard to come by in the current sauntering economy, and companies have tons of cash right now. They are not hiring new workers with it, so it makes sense for stronger companies to pull some of that cash out from under the mattress and look to buy growth.

It will be interesting to see if we look back at the last few days as the key moment when a burst of deals kicked off a new round of M&A. I do expect to see more activity as we round out the year for the reasons we just discussed. In addition, companies in the financial services sector will likely sell or buy units to rationalize operations and, importantly, come into compliance with the Dodd-Frank financial reform law. And in energy, BP is selling $30 billion of assets to cover costs associated with the Gulf oil tragedy.

The current deals put the spotlight on tech and commodities. If you’ve been with us in or Wall Streetfor any length of time, then you probably know how important I think the commodities theme is for investors. The BHP/Potash deal highlights this importance.

Global Growth Drives Commodities

Potash the company is the world’s largest producer of this fertilizer. Potash the nutrient keeps soil healthy and helps produce bigger crops, both critical to meeting accelerating demand for food in developing economies. Fact of the week: China, with a GDP of $1.33 trillion, just surpassed Japan as the world’s second-largest economy.

Demographers expect world population to increase from 6.8 billion currently to about 9 billion in 2050, more than a 30% leap that will fuel demand for potash, precious minerals, oil, copper, water and everything else. At the same time, rising standards of living in developing nations will also increase demand and the competition for food, minerals, oil and water. The market hasn’t focused as much on water and agriculture, and I think they are a couple of areas to watch because of population growth and supply constraints and interruptions.

Commodity prices generally have been rising in recent years, pushed along by growing demand from China, India, Southeast Asia and other developing countries. The key question to answer: Are prices too rich, and where do they go from here?

Prices have dipped 3% to 10% recently for such commodities copper, silver and oil as investors fret over global economic growth and hence underlying demand. But rest assured: the long-term trend is up for most industrial and many agricultural materials. Put that together with the cash that many producers have on their balance sheets and more deals, like this week’s hostile run at Potash, seem certain.

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