VideoWhat a difference a quarter makes. The first nine months of 2003 looked bleak enough. Despite a slight uptick year-to-year in the number of U.S. mergers and acquisitions, the value of the dealmaking fell sharply—threatening to lengthen the slide in M&A to three full years since 2000's all time peak. As the fourth quarter dawned, the year's only $10 billion-plus deal was the $11 billion purchase of John Hancock Financial Services Inc. by Manulife Financial Corp. And that had sneaked in just under the wire, the last weekend in September.
Then came an even bigger deal the first week of October: General Electric Co.'s $14 billion combination of its NBC brand with Vivendi Universal Entertainment. True, it grew from a bidding war that had been waged for months. But it was followed just days later by another announced deal from the reinvigorated GE acquisition team: the $9.5 billion all-stock purchase of British medical diagnostics and life-sciences company Amersham Plc. In another area of health care, Anthem Inc. announced it was buying WellPoint Health Networks Inc. for $16.4 billion. And on the same day came the capper: Bank of America Corp.'s (BofA) $47 billion deal with FleetBoston Financial Corp.
Suddenly, the quarter was special. Even before tallying December's numbers, a hefty full-year rise was assured, and the stage seemed set for a 2004 revival that would reflect the expected continuation of the U.S. economic recovery (see "Turning on a Quarter," at the end of this article).
Is the long-awaited dealmaking resurgence finally under way? After two-plus years of false hopes, prognosticators are skittish about 2004. "Whether or not the overall M&A market is going to rise considerably, it's too early to call," says Robert A. Kindler, managing director of J.P. Morgan Securities Inc.
But something is different as 2004 begins. The underpinnings for consolidations are now there, with the economy stronger and the stock-market recovery looking long-term. "You're going to have a wave of mergers because there are some very good values," says Prof. Arie Y. Lewin, who teaches an MBA course on strategic alliances at Duke University. Most forecasts don't suggest an explosion yet, because the only companies reentering the merger arena "are the ones that had identified their targets, then waited for the right timing," says Lewin.
"We've clearly reached stability," says Kindler, "and I haven't said that at year-end for three years, much to everyone's chagrin here." M&A will keep climbing, he says. "The question is how much."
It's no accident that banking and finance deals are leading the way: they often foreshadow broader M&A activity ahead. "Some people think that [banking and finance deals] will represent 25 to 30 percent of overall merger activity, and I think that's accurate," Kindler says. "You still have about 11,000 banks in the U.S., and many are relatively large-cap entities." Besides BofA—Fleet, more than a dozen finance-related deals announced last year tallied in the $2 billion—plus range, topped by the $16.1 billion St. Paul Cos.—Travelers Property Casualty insurance combination announced in November.
Banking On a Rebound
Bank of America CFO James Hance maintains that the acquisition of FleetBoston is predicated on the improved economic climate. "It played a role in both the timing and the pricing," he says. "It was our view that certainly Fleet was rebounding nicely in the economy, and secondly that the economy was likely to keep rebounding as well, and to pick up steam. Therefore, the risk was less, because when the economy picks up, it's good for banks," with higher interest rates improving the spreads that drive banking profits.
Acknowledging that BofA shares have fallen, in part because investors believed the premium for Fleet was too steep—about 40 percent over its $31.53-a-share price before the deal—Hance argues that the price was appropriate in the current bullish economic mood. Premiums paid for acquisition targets are based on the future cash flow and earnings the buyer expects them to produce, along with unique characteristics that the buyer believes will increase the deal's value. "You don't see franchises like Fleet become available much. It is a franchise no one else can duplicate, and it deserves a premium," says Hance. "And, it had a number of suitors."
The press has noted that some other large deals may have been stymied by BofA's postannouncement stock-price decline. But Hance doesn't think the slippage should discourage other acquirers. Rather, he believes the initial hit the shares took reflected investor surprise—his company had been saying that acquisitions weren't likely—and the falloff reflected "a typical pattern." He adds, "We're getting some rebound."
Subsequent deals that have been announced—Hance mentions specifically the private-equity agreement for Time Warner's music operations—indicate that both the economy and M&A are healthier. "It's comforting to see others doing deals," he says.
Health in Health Care M&A
Bain & Co. senior partner Chuck Farkas, who follows both banking-finance and health care, says that the heightened M&A activity in those two sectors "has kept me in the boiling kettle the second half of the year." And he sees no end in sight for banking and health-care mergers in 2004. The outlook for potential combinations, he says, is "very different from what companies saw 12 months ago."
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