They’ve Come Undone

With buying activity sharply down, merger breakups made the biggest headlines last year.

In late summer, with the economy slouching toward recession, it was clear that deal-making in 2001 would fall far short of the prior year’s stunning $1.7 trillion record.

Looking for some positives in the situation, investment banker Jon Melzer, of Houlihan Lokey Howard & Zukin, in New York, prepared remarks for a luncheon panel. “The dip was dramatic, but not as dramatic as many assumed,” he wrote. Sponsored by the New York Association for Corporate Growth, the panel was to have taken place on September 11. “I didn’t even call to find out if [the event] was canceled,” he says of his reaction to the morning’s terrorist attacks. “I just went home like everybody else.” So much for positives.

As of November 10, the announced deals of 2001 were off 35 percent from 2000, according to Thomson Financial. Their total value was down 56 percent, to $739 billion. Megadeals, those of more than $10 billion, had fallen 73 percent. The five largest deals were worth a combined $155.9 billion, well below the single biggest deal of 2000 (and all time), AOL’s $183 billion purchase of Time Warner. The number of deals under $1 billion fared no better, plunging 35 percent.

“There’s been a pullback across the board,” says Rick Escherich, a managing director in the M&A group at J.P. Morgan in New York, with significant declines “no matter how you try to view the market– large deals, small deals, sectors, private companies, and so on.” As of November 30, valuations had slipped 16 percent, to a median premium of 32.8 percent. And for the first time since 1997, cash has been the preferred currency in a majority of transactions (53 percent).

In fact, the most noteworthy trend in M&A last year concerned the number of deals undone–by regulatory intervention, by doubts about a target’s prospects, by a buyer’s stock-price volatility, or by just plain bad September timing.

“Before 9/11, it was the economy and the financing markets,” says John Reiss, global co-head of the M&A practice for the New York office of law firm White & Case LLP. “Since then, people are not willing to exclude the effects of 9/11, because they are even less certain about how the [target] business will perform going forward.”

The Cruelest Month

While no real spike is shaping up for that final year-end tally of canceled deals, last year’s broken mergers certainly represent a larger percentage of the total bids announced. In July alone, antitrust regulators shifted the two largest deals of the year: General Electric Co.’s combination with Honeywell Inc. and the UAL Corp.-US Airways Group Inc. merger. Indeed, the $53.3 billion value of the terminated deals in that one month exceeded the amount of busted deals for nearly every quarter since 1997.

Late November saw the spectacular collapse of erstwhile energy- trading high-flier Enron Corp., which tried desperately, and unsuccessfully, to find some salvation in an $8.5 billion acquisition by Dynegy Inc.

But tough business conditions scuttled other deals all year. In April, Ariba Inc. cited “challenging economic and market conditions” as it put the kibosh on its $2.5 billion purchase of Agile Software Corp. In late September, FelCor Lodging Trust, the nation’s second-largest hotel real estate investment trust, blamed “the aftermath of the terrorist attacks” for the decision to terminate merger plans with MeriStar Hospitality Corp.


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