Looking Back, Looking Ahead: M&A in 2003 and 2004

Weekly Corporate Growth Report, Jan 12, 2004 by Dolbeck, Andrew

After a long period of limited M&A activity, companies started to make deals again in 2003. The pace of mergers and acquisitions picked up in the second half of the year. The recovery is not certain, however. Buyers remain cautious and long pauses in deal activity followed nearly every flurry of new deals. Merger and acquisition activity in 2003 more than doubled in the fourth quarter of the year, boosted by some particularly high value deals.

According to the Wall Street Journal, "The renewed interest in pursuing mergers and acquisitions came amid signs of an improving economy and a rising stock market." Many acquisitions are paid for with stock or a combination of cash and stock. As stock values increase, corporations have more resources with which to make such transactions. The increased availability of financing is making it easier for buyers to afford acquisitions as well.

Another explanation for the increase in deal activity late in the year is that companies are finally getting back to pursuing acquisition strategies that were put on hold while they dealt with the more immediate economic crisis. After two years of cutting costs and repairing balance sheets, companies are again thinking about growing by acquisition. "Companies got back to their strategic agendas at the end of spring, a lot of deals gestated over the summer, and we saw a heightened level of activity post-Labor Day," said Stephen Munger, cochairman of global mergers and acquisitions at Morgan Stanley.

According to data from Thomson Financial, $525.6 billion worth of domestic M&A deals were announced in 2003, an increase from $457.9 billion in 2002. According to data gathered by Dealogic, a research firm, global mergers and acquisitions increased by 2 percent last year, to a total of $1.39 trillion. Although the worldwide deal figures are an increase over 2002, they still fall short of the $1.6 trillion of deals in 2001 and the record $3.4 trillion generated by the M&A craze of 2000.

Thomson data show the total rank value of mergers and acquisitions for European targets increasing 5.1 percent in 2003, primarily due to strong first and fourth quarters. The United Kingdom was the most active market place in Europe, with 2,623 deals resulting in a total value of $134.8 billion. Activity in Italy increased by 31.8 percent in 2003. France and Germany both ended the year down from their year-end totals of the previous year.

M&A bankers are predicting a further increase in M&A activity for 2004. Paul Gibbs, global head of M&A research at J.P. Morgan, said to expect an increase around 20 percent. Mark Mealy, head of investment banking at Wachovia Securities, has predicted "double digit growth" in announced deals for 2004. Other bankers have made similar predictions, mostly in the 15 percent to 20 percent range.

Activity is expected to occur primarily in the mid-market, with acquisitions of giant corporations remaining rare. There is some hope for larger deals, however, as many of 2003 largest deals occurred near the end of the year and it is still possible that they may usher in a wave of larger transactions. Big deals announced late in 2003 included Bank of America's $49.3 billion deal with FleetBoston Financial, Anthem's $16.4 billion planned acquisition of WellPoint Health Networks, and St. Paul Cos. Inc.'s $16.1 offer for Traveler's Property Insurance. Overall, the volume of mergers valued between $5 billion and $10 billion spiked almost 60 percent over 2002, with a total value of $121.9 billion.

While 2003 ended with large corporate deals, it began with asset sales. The first half of the year was dominated by companies divesting noncore operations. Some of these sales were of substantial size. Sears, Roebuck & Co. sold its credit card operations to Citigroup for about $3 billion, while Liberty Media took control of QVC Inc. by buying a 57 percent stake from Comcast Corporation for $7.9 billion.

Despite the increases in deal activity, investment banking fees continued to decrease. According to Dealogic estimates, Wall Street suffered a nine percent dip in M&A fee income, bringing the total down to $10.5 billion. The role of private equity in deal making is on the rise, however. Last year, private equity accounted for $181.3 million, or 13 percent of total deal value, according to Dealogic. This is an increase of 41 percent over the previous year.

Will the M&A trend continue into 2004? Corporate enthusiasm for mergers may continue to rise, but dealmakers will continue to be cautious. One reason that the numbers for 2003 weren't higher is that companies are being more cautious in deal spending, keeping the annual total deal value low. While deal activity may increase, it is not likely to reach the levels seen in the year 2000.

Sources: The Daily Deal, Mergers and Acquisitions Report, Wall Street Journal

By Andrew Dolbeck

Editor