We can all probably agree that it’s hard to argue the case for optimism at this point. Since the beginning of May, we’ve seen sluggish economic growth, sharp periodic market selloffs, continued high unemployment, fairly weak consumer spending, and a slew of mixed economic data.
However, the weak overall economy is actually helping an important aspect of corporate deal making: financing. With 10-year Treasuries dropping below 2.6%, corporate borrowing rates are at historic lows. This past week, businesses have capitalized, pushing global merger activity to its highest levels since late 2009.
On Wednesday, Intel Corp announced its plans to take over internet security giant McAfee Inc.(MFE) for $7.7 billion, all in cash. Just hours after the announcement, First Niagra Financial Group announced that it would acquire NewAlliance Bancshares Inc. for $1.5 billion, the largest bank merger since the 2008 financial crisis. On Tuesday, BHP Billiton made a $39 billion offer for Potash Corp, though Potash did not bite.
Other noteworthy acquisitions this week have been Rank Group’s $4.6 billion purchase of Pactiv (the maker of Hefty trash bags), and Dell’s $1.2 billion purchase of 3PAR.
Coupled with record low borrowing rates, U.S. public companies have been sitting on $2.03 trillion in cash and short-term investments since the end of the first quarter, which is 57% above the Q1 level in 2006. While the stock and bond markets continue to tread water, it seems some executives are tired of waiting for conditions to improve.
"Across sectors, strong players are being opportunistic. They are willing to make bets and not remain sitting on the sidelines,” said First Niagra President and CEO John R. Koelmel.
While U.S. deal activity has been weak for the majority of 2010, this week’s slew of announcements is being regarded as a vote of confidence from executives.
Just last week, Blackstone Group reached an agreement to purchase power generator Dynegy for $550 million. Caterpillar’s Doug Oberhelman told investors that now is a good time to pursue acquisitions.
Moving forward, large global companies are expected to be at the forefront of mergers and acquisitions. They have the ability to make long-term strategic bets and pay high premiums (all in cash) to secure smaller companies vital to their growth. Analysts expect technology, energy, health care, and commodities sectors to lead in deal-making, as they are less exposed to financial downturns.
Global merger & acquisition volume is up by roughly 24% from the 2009 pace, with surprising strength coming from China and India. Cross-border deals to date have already trumped 2009’s total volume.
"The macro environment for M&A is extremely good right now… You've got the whole tectonic plate-shifts with China and India…and the amount of money that exists on balance sheets is astonishing," said Mr. Profusek of Jones Day.
While the bears may not want to hear it, the bottom line is when companies are willing to buck up and make acquisitions, it means stock prices are decent values, financing is available, and business is good. How is this bad again?
McAfee Intraday
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