Editor’s Note: See CFO.com’s exclusive look at “Why Cisco Loves Private Equity” at the end of this article.
Only half in jest, Wall Street debt analyst Carol Levenson suggests that the 2006 surge in merger-and-acquisition activity reflected companies combining “to make themselves less vulnerable to a private-equity bid.” Indeed, private equity (PE) accounted for more than a quarter of total proposed deal values last year—with the $25 billion–plus buyout bids for HCA Inc. and Harrah’s Entertainment Inc. leading a long list of monster transactions. And it was the main reason that the 12-month M&A rampage was challenging the $1.7 trillion record for U.S. transaction values set in 2000.
Moreover, private acquirers are fundamentally changing 21st-century M&A with their deep pockets, lower internal-rate-of-return hurdles, and tough approach to valuations. “Private equity is raising expectations for all mergers,” says Punit Renjen, leader of Deloitte Consulting’s merger-integration practice, noting how its operating style offers “zero tolerance for nonperformers.”
But that doesn’t mean strategic deals in the public-company arena are dead. Far from it. The $16.5 billion proposed merger of Bank of New York Co. with Pittsburgh’s Mellon Financial Corp.—part of a rush of giant announcements toward the end of the year—aims to blend Mellon’s huge wealth-management business and BNY’s asset-servicing and short-term-lending specialties into a new brand of global banking under the name Bank of New York Mellon Corp. (See On the Record.) Adding scale was another motivation, with huge examples being the $22.6 billion Freeport McMoRan and Phelps Dodge copper-and-gold merger and Anadarko Petroleum’s acquisitions of Kerr-McGee and Western Gas Resources for a total of $23.3 billion. AT&T’s $89.4 billion overture for BellSouth in March, the year’s biggest proposed deal entering late December, of course, may smack of irony after years of phone-company breakups. Still, its completion will have a major impact on 2007 M&A. Look for the “cascading effect” of smaller equipment-supplier combinations as that and other telecom deals go through, suggests Deloitte’s Renjen.
“The big private-equity transactions
get noticed first because they’ve come so
far so fast, but the majority of deals still get
done by corporates,” says Steven M.
Bernard, director of M&A market analysis
for Milwaukee-based investment banker
Robert W. Baird & Co. “And we’ve seen
some substantial strategic moves in this
favorable environment of high stock prices
and the ability to borrow at low rates.”
One other strategic theme in 2007 will
be the transforming of product delivery
across entire industries, Bernard predicts — a quality reflected in two life-sciences
deals that weighed in at more
than $10 billion in 2006. One created
Thermo Fisher Scientific Inc. as a laboratory-
instrument leader. The other, proposed
in November, would combine CVS
Corp. and Caremark Rx Inc. into a behemoth
managing more than a quarter of the
nation’s prescriptions (through Caremark),
while dispensing many of those drugs via
CVS-run pharmacies coast to coast.