The New Urge To Merge

As merger activity picked up slightly in the first quarter, it was clear the corporate buyer with cash and stock was king, a trend that should continue for some time.

Of the $189.3 billion in first quarter deals, corporate buyers dominated and the private equity world was responsible for just $4.3 billion, according to S&P/Capital IQ.

After a sharp drop in deal activity as the economy choked in the fourth quarter, there's now a slight pickup in the urge to merge among companies looking to grow their businesses strategically. They are driven in part by relatively cheap stock prices and slow growth in their own businesses.

Deal activity was at just $115.6 billion in the fourth quarter, and the private equity community was responsible for just $5.7 billion. This was down from the third quarter's $266 billion, which included $9 billion of private equity activity. In fact, the last private equity deal valued at more than $1 billion was Blackstone's $1.19 billion deal for Allied Security Holding in July, 2008.

This is also a major change from the record $520.9 billion in U.S. deals in the second quarter of 2007, when PE was on top as one of the hottest businesses on Wall Street. In that quarter, private equity did a whopping $186.6 billion in deals, more than half the $334.3 billion done by corporate buyers.

Fund manager Mario Gabelli, who appeared on "Squawk Box" Tuesday, said there are some obvious industries where consolidation will continue. He also said it is not likely PE will be a major player any time soon.

"You're just seeing the train just out of the station for health care," he said in an interview after the show. Four of the top 10 deals in the first quarter were health care mergers. He also said cap and trade may result in utilities mergers, and food companies could continue consolidating. The Mars/Wrigley deal could also spur interest among other candy companies.

Corporate buyers are also lucky that they did not jump in when stock prices and deal activity peaked in 2007. "They got boxed out," Gabelli said.

Now, private equity firms find that the cash flow can't support some of the deals structured in that heady time, and some of those companies will have a hard time refinancing their debt. "The numbers that are coming out now are indicative that they were drunken sailors," said Gabelli.

The biggest deals in the first quarter were Pfizer's acquisition of Wyeth for 78.6 billion and Merck's $50.7 billion deal for Schering-Plough.

While current merger activity is sluggish compared to past quarters, the fact that companies are willing to put a price on a business they'd like to own is a slightly positive comment on the economy and also a slight positive for stocks. "We've had some stability, and equities prices are going up," said Pimco Chairman Mohamed El-Erian, in a quick interview after he too appeared on "Squawk Box" Tuesday. But deal financing is still an issue, he said.

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