“A year ago, everyone knew how the system worked,” Rossinyol says. “Now everything changes from one week to the next. There are no rules. There is a lot of mistrust in the markets.”
Jason Karaian is deputy editor and Tim Burke is senior editor at CFO Europe.
Can’t Buy, Won’t Buy
Much can change in a year. In December 2007, CFO Europe’s M&A round-up collected tales from CFOs who thought that the credit crunch would unlock fresh opportunities for cash-rich companies to pick up bargains.
The reality today is that the crisis has left dealmakers in a state of limbo. Having cut dividends, cancelled buybacks and convened working-capital taskforces, companies would rather hoard cash than commit to M&A. (See “Going It Alone” at the end of this article.) At the same time, executives who want to sell see little point in doing so while values are so low. And private equity firms, which fuelled the previous M&A boom, can’t access enough debt to take advantage of low valuations. “There is frustrated demand from all sides,” says Daniel Domberger at London-based corporate advisory firm Livingstone Partners.
Anglo-Australian mining giant BHP Billiton’s failed bid for rival Rio Tinto is a sign of the times. After more than a year of wrangling, BHP finally dropped the pursuit in late November 2008, making it the largest withdrawn deal in history. When launched, in November 2007, the all-share bid was worth around $140 billion (€111 billion).
In pulling out of the deal, BHP cited falling commodity prices, the post-deal debt burden and antitrust issues, a combination that produced “unacceptable levels” of risk to shareholder value. Despite writing off $450m in costs related to the bid, the suitor’s shares surged on the news. And though the banks that were to support the bid will lose out on a reported $140m in fees, the upside is that they are now off the hook for the $55 billion debt facility lined up to finance the deal.
That isn’t to say that M&A dried up altogether in 2008. Belgian beer maker InBev’s $52 billion takeover of American rival Anheuser-Busch, completed in November, was a notable mega-deal. And some companies are still on the prowl. Also in November, Eldar Sætre, CFO of Norwegian oil and gas group StatoilHydro, told analysts that the company continued to stalk targets, which “could even be cheaper than they were some time ago.”
But in contrast to the heady days of 2007, optimism such as Sætre’s will be the exception rather than the rule in 2009. “People are worried that they are going to be the sucker that buys when the market has further to fall,” says Philip Richards, a partner at law firm Freshfields. “I don’t think public company boards will have the nerve to do anything of size, even if they’ve got the resources to do it.”