VideoEditor's Note: See CFO.com's exclusive look at "Why Cisco Loves Private Equity" at the end of this article.
Only half in jest, Wall Street debt analyst Carol Levenson suggests that the 2006 surge in merger-and-acquisition activity reflected companies combining "to make themselves less vulnerable to a private-equity bid." Indeed, private equity (PE) accounted for more than a quarter of total proposed deal values last year—with the $25 billion–plus buyout bids for HCA Inc. and Harrah's Entertainment Inc. leading a long list of monster transactions. And it was the main reason that the 12-month M&A rampage was challenging the $1.7 trillion record for U.S. transaction values set in 2000.
Moreover, private acquirers are fundamentally changing 21st-century M&A with their deep pockets, lower internal-rate-of-return hurdles, and tough approach to valuations. "Private equity is raising expectations for all mergers," says Punit Renjen, leader of Deloitte Consulting's merger-integration practice, noting how its operating style offers "zero tolerance for nonperformers."
But that doesn't mean strategic deals in the public-company arena are dead. Far from it. The $16.5 billion proposed merger of Bank of New York Co. with Pittsburgh's Mellon Financial Corp.—part of a rush of giant announcements toward the end of the year—aims to blend Mellon's huge wealth-management business and BNY's asset-servicing and short-term-lending specialties into a new brand of global banking under the name Bank of New York Mellon Corp. (See On the Record.) Adding scale was another motivation, with huge examples being the $22.6 billion Freeport McMoRan and Phelps Dodge copper-and-gold merger and Anadarko Petroleum's acquisitions of Kerr-McGee and Western Gas Resources for a total of $23.3 billion. AT&T's $89.4 billion overture for BellSouth in March, the year's biggest proposed deal entering late December, of course, may smack of irony after years of phone-company breakups. Still, its completion will have a major impact on 2007 M&A. Look for the "cascading effect" of smaller equipment-supplier combinations as that and other telecom deals go through, suggests Deloitte's Renjen.
"The big private-equity transactions get noticed first because they've come so far so fast, but the majority of deals still get done by corporates," says Steven M. Bernard, director of M&A market analysis for Milwaukee-based investment banker Robert W. Baird & Co. "And we've seen some substantial strategic moves in this favorable environment of high stock prices and the ability to borrow at low rates."
One other strategic theme in 2007 will be the transforming of product delivery across entire industries, Bernard predicts — a quality reflected in two life-sciences deals that weighed in at more than $10 billion in 2006. One created Thermo Fisher Scientific Inc. as a laboratory- instrument leader. The other, proposed in November, would combine CVS Corp. and Caremark Rx Inc. into a behemoth managing more than a quarter of the nation's prescriptions (through Caremark), while dispensing many of those drugs via CVS-run pharmacies coast to coast.
One-stop Shopping
The Thermo Fisher deal had to wait until
Thermo Electron pulled itself together — literally.
In 2001, Thermo Electron integrated dozens of majority-owned companies that were part of an unusual corporate structure involving spin-outs of its businesses into majority-controlled public entities. "We spent the last five years convincing people that we were one company, with one brand called Thermo," says Thermo Fisher CFO Pete Wilver. During that time, Waltham, Massachusetts-based Thermo Electron concentrated on its scientific-instrumentation business and rarely acquired. There were, however, occasional conversations between its CEO and the CEO of Fisher Scientific International, a Hampton, New Hampshire–based firm that specialized in "consumable" products used in labs, often in conjunction with Thermo products. The talks didn't amount to anything, at least initially.
As Thermo and Fisher grew independently in their own corners of life sciences, they each ignored "one major piece" of the industry, says Wilver, Thermo Electron's CFO at the time. Thermo steered clear of consumables, while Fisher avoided instruments. But once Thermo's reorganization was complete, the two CEOs began to discuss a corporate combination that "would allow customers to do one-stop shopping" for their lab equipment and materials. The ensuing $12 billion reverse merger gave Fisher holders two shares of Thermo common for each Fisher share owned and combined the two managements under Thermo Electron's CEO and CFO.
Reader Comments» Post a comment