VideoOne executive's junk is another's acquisition currency.
Thanks to 19 percent returns year-to-date on junk bond mutual funds, investors are pouring money into these portfolios.
U.S. junk bond mutual funds attracted $1.14 billion in the week ended September 3, according to AMG Data Services.
This sum comes on top of the record $3.3 billion that flowed into these funds the prior week. Altogether, investors have plunked down about $22 billion this year on funds that specialize in high-yield bonds.
Investors' preference for speculative paper combined with very low interest rates in general has, in turn, helped to bankroll mergers and acquisition activity. In fact, M&A activity has at least partially accounted for 25 percent of new junk bonds sold in the third quarter, compared with 16 percent in the second quarter, according to Reuters, citing Moody's Investors Service.
"As people have a higher appetite for risk, the high-yield market may be the right vehicle for some M&A," Kingman Penniman, president of high-yield research firm KDP Investment Advisors, told the wire service. "That's your next big leg of primary issuance."
M&A activity still hasn't come roaring back: The number of deals is still off by about 14 percent from a year ago, according to Dealogic, and stock-only deals are down by half. Reuters points out, however, that more companies are using a mix of stock and cash to bankroll their deals.
"High-yield is going to be part of financing these [M&A] transactions because of demand that's arisen in the market for higher-yielding fixed-income assets," Michael Taylor, a Bear Stearns high-yield analyst, told the wire service.
Indeed, there are two pending deals in which the buyer plans to issue debt to complete the transaction. Battery maker Rayovac Corp. intends to issue debt to help finance its $322 million purchase of Remington Products Co., notes Reuters, and defense contractor DRS Technologies said it will sell bonds to help pay for its $550 million purchase of Integrated Defense Technologies.
Companies issuing junk bonds also don't need to sell investors as hard as they needed to earlier in the year. Junk bonds now yield an average of 516 basis points more than Treasurys, down from 846 points at the beginning of the year, according to Merrill Lynch. Obviously, investors are much more comfortable buying this speculative paper. (They may still be uncomfortable, however, with the rating agencies themselves, which are under review for their failure to downgrade Enron more promptly.)
And corporate decision makers, it seems, are much more comfortable venturing into the M&A arena. In a survey of 207 senior executives by The Deal, 55 percent said they expect their acquisition activity to increase "more" or "much more" during the next year. Nearly half of the respondents said they would consider making a hostile bid if circumstances called for it.
The factors are most likely to motivate future acquisitions, according to the respondents, are access to new markets (cited by 73 percent), industry consolidation (60 percent), and access to new technology and products (56 percent).
Of course, history is littered with failed deals. Why? Lack of attention to post-merger integration (cited 85 percent) was the most common response, followed by overpayment (71 percent). Only 40 percent said that attempting a "transformative" deal — when a merger endeavors to change the landscape of an industry — was a reason that deals might falter.
The relatively recent rise in equity values has not prompted the majority of respondents to seek out deals. Only 37 percent said that a higher stock price increases their willingness to consider an acquisition; 48 percent claimed that stock price is unimportant.
Finally, 85 percent of the respondents said they anticipate divestiture activity to remain about the same, or to fall, in the coming year. (On the other hand, CFO magazine's March article "Close to Divest" maintained that many companies are poised to shed failed acquisitions — it's just that few want to talk about it.)
Court Dismisses Lawsuit Against Halliburton
A Dallas federal court has dismissed a lawsuit alleging accounting fraud at Halliburton while Vice President Dick Cheney headed up the oil services company.
The suit, filed in July 2002 by the Washington, D.C.-based political group Judicial Watch, charged that beginning in 1998, Halliburton's reported revenue on long-term fixed-price construction projects was materially overstated and misleading. At the time of the original filing, Halliburton issued a statement saying that the Judicial Watch claims were "untrue, unsupported and unfounded."
In dismissing the suit, the court held that the plaintiffs' complaint did not allege facts that indicate that the revenue reported was wrong or that it was false, the company stated in a press release.
In May, Halliburton announced that it had entered into a memorandum of understanding to settle about 20 shareholder class-action lawsuits based upon similar allegations while admitting no wrongdoing.
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