The Start of Something Big?

A blockbuster fourth quarter gives even pessimists hope that M&A activity has finally turned the corner.

What a difference a quarter makes. The first nine months of 2003 looked bleak enough. Despite a slight uptick year-to-year in the number of U.S. mergers and acquisitions, the value of the dealmaking fell sharply—threatening to lengthen the slide in M&A to three full years since 2000′s all time peak. As the fourth quarter dawned, the year’s only $10 billion-plus deal was the $11 billion purchase of John Hancock Financial Services Inc. by Manulife Financial Corp. And that had sneaked in just under the wire, the last weekend in September.

Then came an even bigger deal the first week of October: General Electric Co.’s $14 billion combination of its NBC brand with Vivendi Universal Entertainment. True, it grew from a bidding war that had been waged for months. But it was followed just days later by another announced deal from the reinvigorated GE acquisition team: the $9.5 billion all-stock purchase of British medical diagnostics and life-sciences company Amersham Plc. In another area of health care, Anthem Inc. announced it was buying WellPoint Health Networks Inc. for $16.4 billion. And on the same day came the capper: Bank of America Corp.’s (BofA) $47 billion deal with FleetBoston Financial Corp.

Suddenly, the quarter was special. Even before tallying December’s numbers, a hefty full-year rise was assured, and the stage seemed set for a 2004 revival that would reflect the expected continuation of the U.S. economic recovery (see “Turning on a Quarter,” at the end of this article).

Is the long-awaited dealmaking resurgence finally under way? After two-plus years of false hopes, prognosticators are skittish about 2004. “Whether or not the overall M&A market is going to rise considerably, it’s too early to call,” says Robert A. Kindler, managing director of J.P. Morgan Securities Inc.

But something is different as 2004 begins. The underpinnings for consolidations are now there, with the economy stronger and the stock-market recovery looking long-term. “You’re going to have a wave of mergers because there are some very good values,” says Prof. Arie Y. Lewin, who teaches an MBA course on strategic alliances at Duke University. Most forecasts don’t suggest an explosion yet, because the only companies reentering the merger arena “are the ones that had identified their targets, then waited for the right timing,” says Lewin.

“We’ve clearly reached stability,” says Kindler, “and I haven’t said that at year-end for three years, much to everyone’s chagrin here.” M&A will keep climbing, he says. “The question is how much.”

It’s no accident that banking and finance deals are leading the way: they often foreshadow broader M&A activity ahead. “Some people think that [banking and finance deals] will represent 25 to 30 percent of overall merger activity, and I think that’s accurate,” Kindler says. “You still have about 11,000 banks in the U.S., and many are relatively large-cap entities.” Besides BofA—Fleet, more than a dozen finance-related deals announced last year tallied in the $2 billion—plus range, topped by the $16.1 billion St. Paul Cos.—Travelers Property Casualty insurance combination announced in November.

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