KPMG Notes Record Cross-Border M&A Spending

Business Wire, Oct 27, 1997

NEW YORK--(BUSINESS WIRE)--October 27, 1997--

Prices Surge in Utilities, Telecom and Banking

Middle Market Deals Hold the Spotlight

Led by US firms and white-hot American capital markets, spending on global mergers and acquisitions through the third quarter of 1997 is on track to shatter the 1996 all-time high, while spending on cross-border megadeals - which KPMG defines as transactions priced at over $1 billion - actually dropped compared to the first three quarters of last year, according to KPMG Peat Marwick LLP's latest survey of cross-border transactions.

"This decline in cross-border megadeals hides the real story," said Stephen Blum, a KPMG Corporate Finance partner based in New York. "More purchasers - not just the industry leaders - have turned to the global M&A marketplace, doing more deals in the $100 million to $1 billion range. Their smaller purchases, not the `headline deals,' are driving this year's cross-border M&A boom."

KPMG's survey tracks publicly announced merger activity, including joint ventures and minority stake purchases between purchasers and targets located in different countries.

"We're seeing key changes in targeted regions and industry segments, and in deal sizes, structures and appetites for risk," Blum explained. "But records keep falling: cross-border deal spending topped $210 billion through the third quarter of 1997, up 14% from $184 billion for the same period last year." This pace comes despite a 15% drop in the number of purchases, from 4,355 to 3,720.

Behind the magnitude of 1997 deal spending are some interesting trends:

-- Firms in more countries have spent heavily in 1997 on cross-border purchases;

-- these purchasers have sought targets in more countries;

-- although megadeal spending has declined this year, prices and deal sizes have surged even faster than global deal spending; and

-- industries facing regulatory and technological change have attracted a growing share of this year's cross-border spending.

Cross-border purchasers spent an average of $57 million through September, 1997, up a remarkable 34% from the same period last year. "Most intriguing is the fact that prices have risen so much despite an 8% drop in megadeal spending," said Blum. "Usually, spending on these largest deals drive overall global deal pricing. We're seeing a greater focus on cross-border deals in the middle market, as more firms decide to go abroad via M&A," Blum added.

US Firms Fuel the Global Boom But Shift Their Sights to the Americas

Driven by a strong dollar, heady stock prices, ready lenders and an increasing sense of strategic urgency, US purchasers increased their cross-border spending to $47 billion on 1,081 targets through September, compared to $38 billion on 1,118 targets during the 1996 period. To date, US companies have spent an average of only $44 million on each purchase abroad, compared to the average of $63 million spent by acquisitive firms based elsewhere. "US firms also tend to look in different places and at different industries," noted Blum. "For instance, four of our six favorite M&A targets this year have been countries in the Americas, and only one - the UK - is also among the countries most targeted by purchasers based abroad. And US firms have spent more heavily in 1997 on cross-border M&A in the energy and chemical/pharmaceutical fields than purchasers based abroad," said Blum.

The US remains the world's favorite M&A target, according to KPMG. Through September, foreign-based companies spent $43 billion on 601 purchases here, compared to $52 billion on 612 purchases for the same period last year, down 17% and 2% respectively. Canadian, UK and Swiss firms accounted for more than one-half of both cross-border spending and deal activity in the US. "Although the US still attracts huge amounts of foreign capital through M&A deals, our strong dollar and extraordinary equity values deterred foreign bidders. They had to settle for smaller targets," noted Blum. "German and Japanese problems caused continued M&A spending into the US by German and Japanese firms to fall by more than 80% through September, with the number of purchases here down by more than one-half."

Big Global Changes in Regional Industry M&A

Globally, continued heavy M&A spending on banking targets has been surpassed by spending on electrical utility and telecommunication firms. Through September, these three industries saw combined spending rise 62% from $34 billion to $55 billion. For example, in the electrical utilities field, a consortium led by Iberdrola SA of Spain paid $1.6 billion to purchase Coelbo Compannia de Electricidade of Brazil. China Telecom bought an interest in Hong Kong Telecommunications Ltd. for $1.2 billion. "Both of these fields have been on center stage, globally, due to regulatory changes and - in the case of telecom - the quest for end-to-end phone networks that will eventually span the globe," said Blum. Medical technology and consumer food products have also experienced big jumps in cross-border M&A spending.