CORPORATE FINANCING FOCUS: Cross-Border Mergers Set Record, As Global Consolidation Continues In Many Industries

Global Finance, Feb 2008 by Platt, Gordon

Cross-border mergers and acquisitions accounted for a record 47% of worldwide M&A transactions in 2007, as global consolidation continued to drive merger activity in the materials, financials, and energy and power sectors, according to Thomson Financial.

Cross-border volume involving US-based target companies increased steadily throughout the year as the dollar weakened, making US companies more attractive takeover targets or investments by foreign buyers. US inbound volume more than doubled during the fourth quarter of 2007 compared to the same period a year earlier.

Elsewhere, Australia-based mining company BHP Billiton's $145 billion bid for Rio Tinto, based in the United Kingdom, ranks as the second-biggest deal of all time. Rio Tinto rejected BHP Billiton's proposed all-share offer shortly after it was announced last November, but BHP is persevering with its approach.

Merger activity in the financials sector accounted for 16% of merger activity in 2007, led by the takeover of Netherlands-based ABN AMRO by a consortium led by the Royal Bank of Scotland, which ranks as the biggest financial merger on record. Santander of Spain and Belgian-Dutch banking and insurance firm Fortis were the other members of the buying group.

Worldwide M&A Rises 24%

Worldwide M&A reached a record $4.5 trillion in announced deals in 2007, a 24% increase over the previous record set in 2006, according to Thomson Financial, a provider of information and technology to the financial community. "Despite a dramatic falloff in merger activity caused by concerns in the credit markets in the third quarter of 2007, fourth-quarter activity rebounded to surpass the $1 trillion mark amid strong strategic activity and a flurry of cross-border investments by Middle Eastern and Asian investors," Thomson Financial said in its review of M&A activity in 2007.

M&A activity in Europe rose 36% last year to $1.8 trillion, surpassing the total for the United States for the first time since 2002.

Goldman Sachs topped the league tables for financial advisers on worldwide M&A deals announced in 2007. Goldman had a big lead in the industrials sector and ranked a close second to Morgan Stanley in the financials sector. Morgan Stanley finished second in the global financial adviser rankings, followed by Citi, JPMorgan and UBS.

Mergers in the industrials sector led all industry groups by number, with more than 5,600 deals announced worldwide last year.

On a regional basis, Goldman Sachs was the leading financial adviser on announced deals in the Americas last year, and Morgan Stanley was the leader in Europe. UBS was the top financial adviser in the Asia ex-Japan region, while Nomura led the league tables in Japan.

Private Equity Deals Slump

The credit market crisis had a big impact on deals by private equity firms or financial sponsors in 2007, which still accounted for more than $872 billion in announced deals, or 19.5% of the overall annual volume. However, only one such transaction of more than $5 billion was announced after July, as against 32 deals above $5 billion each during the first seven months of 2007. Financial sponsors accounted for just 9% of announced transactions during the fourth quarter of 2007, the lowest quarterly level since the first quarter of 2004, according to Thomson Financial.

Private equity firm Cerberus Capital Management agreed on December 24 to pay United Rentals a $100 million breakup fee for scrapping its $4 billion purchase of the Greenwich, Connecticut-based equipment-rental company. United Rentals took Cerberus to court for walking away from the deal, but a Delaware court ruled that the private equity firm was allowed to abandon the takeover.

Student lender Sallie Mae has also gone to court in Delaware to try to collect a $900 million breakup fee from private equity firm JC Flowers.

Mezzanine Funds Formed

As bonds and loans to finance leveraged buyouts have dried up, many securities firms are forming mezzanine funds to make loans to companies at higher rates than banks and buy their preferred stock. Mezzanine debt is secured only by the equity of the company and not by the company's tangible assets, such as property, cash and accounts receivable.

Goldman Sachs is raising $20 billion for the biggest mezzanine fund. Los Angeles-based TCW is raising $4.5 billion to be split between two funds. New York Life Capital raised $800 million in November for its second mezzanine fund.

With the dollar sinking, foreign companies will tend to use cash on hand instead of leveraged buyouts or other financing vehicles to acquire or invest in US-based companies, according to a report by middle-market investment bank Trenwith Securities. In addition, US companies will still be hesitant to receive stock as payment, considering that many Asian exchanges are trading at unsustainable multiples, according to Trenwith. The firm has 10 US offices that provide access to global markets through a network of 600 independent member-firm offices of BDO International, including a significant presence in China.