Deals and IPOs

With Blow-Away August, Are Mergers Back? Well, Sort Of

Andrew Ross Sorkin

On Wall Street, it is called the “black car indicator” — a reference to the limousines lined up around investment banks to ferry home young analysts who have pulled near-all-nighters while working on deals.

Negotiating Pay

Based on the surprising number of mergers and acquisitions this month, those black town cars must be double-parked.

August is shaping up to be the busiest month for M.& A. in recent memory.

On Monday, we drew near the threshold of $200 billion worth of deals worldwide for the year, including a $1.6 billion “deal jump” by Hewlett-Packard for the data storage company 3Par, pitting H.P. against Dell.

The animal spirits of corporate America appear to have awakened, with business leaders feeling bold again even as the economy remains sluggish.

Yet a chorus of senior deal makers, who ordinarily would be eager cheerleaders for a mergers revival, are saying: Not so fast.

If you ask them, they will suggest that all the recent merger hoopla may be a positive sign, but it is overdone.

“I’m as befuddled as anyone,” said Mark G. Shafir, head of global mergers and acquisitions at Citigroup. “This is a blow-away August. Yet I can’t call it a trend.”

As Roger C. Altman, chairman of Evercore Partners and a former deputy secretary of the Treasury, put it, “We’re not on the space shuttle.” Using another analogy, he added, “Has the dam just broken? No.”

Paul G. Parker, head of global mergers and acquisitions at Barclays Capital, concurred, saying, “I don’t expect a cork-popping explosion of M.& A.”

So while stock investors may take the recent spate of deals as a sign of confidence in the economy, they shouldn’t get too excited.

With unemployment hovering near 10 percent, the latest wave of deals is unlikely to bolster the job market any time soon.

Indeed, expect quite the opposite: Some of these deals are being driven by “savings,” an overused euphemism for layoffs.

Moreover, many of the deals are being driven by a slowing of organic growth as companies with cash look to pump up their bottom lines.

“If you can’t grow, how do you support your multiple?” Robert A. Profusek, head of mergers and acquisitions at the law firm Jones Day, asked rhetorically before answering his own question. “You do a deal.”

That’s not to say the recent spate of big deals — with BHP Billiton’s $38.6 billion unsolicited offer for the Potash Corporation last week being the largest — is a freakish storm.

Coupled with the cheap cost of capital, the enormous amount of cash on corporate balance sheets estimated at $2 trillion to $3 trillion, is a heady cocktail that may augur more deals.

“Shareholders are telling companies, either do something with all the cash or give it back to us,” Mr. Profusek said.

But the question remains: How can there be so much confidence in boardrooms at a time of so much uncertainty in the stock market and the larger economy?

“If you believe that M.& A. is a lagging indicator of economic confidence, it may make sense,” said Mr. Shafir, of Citigroup.

A confluence of issues has helped spur deals in technology and natural resources in the last several weeks, but the timing was most likely serendipity. “That’s just the vagaries of a schedule,” Mr. Altman said.

Yet the emergence of China and “its insatiable need for resources,” Mr. Altman added, should mean “we’ll see a gradual improvement.”

And Mr. Parker, of Barclays Capital, suggested that cross-border deals, which represented 35 percent of mergers this year, point to a shifting dynamic in the marketplace that might be less dependent on the health of the United States economy.

Still, it will take a broad pickup in the nation’s economic growth before merger mania can really take hold.

“It’s a business-led recovery, not a consumer recovery,” Mr. Parker said. “If consumers don’t ultimately kick in, it’s not sustainable.”

At least for now, however, businesses are not waiting for consumers to jump back into the fray. And deal-making may be as much about psychology as anything else.

“It’s momentum-building, and it builds on itself,” Mr. Parker said.

Mr. Altman estimates that we are in the second year of a five- to seven-year merger expansion. He says that he often shows clients a 40-year chart of M.& A. activity, which reflects cycles of five- to seven-year periods of expansion followed by a two- to three-year downturn.

Mr. Profusek of Jones Day, who is known as Bob and believes he “invented” the black car indicator, said that if August was any guide, it would be a busy rest of the year.

“I’m an avid golfer, and I have yet to play in August,” he said. “That’s the Bob indicator.”