Deals: Has Anyone Seen Monty Hall Lately?

Despite a few mega mergers, 2000 has not been a blockbuster year, except for two sectors.
Alix StuartOctober 18, 2000

AOL/Time-Warner. Chase Manhattan/J.P. Morgan. JDS Uniphase/SDL.

So, you think that 2000 is shaping up to be a blockbuster year for deals given the number of mega- mergers? Think again.

Actually, the huge growth in U.S. merger volume seen in previous years is unlikely to be matched in 2000, with year- to-date volume sitting at approximately the same level it was at this time last year. As of mid- October, 7739 deals worth about $1.2 trillion had been announced, only slightly ahead of the 7411 deals worth about $1 trillion announced by the end of last year’s third quarter, according to Mergerstat. That’s off from the record growth in the value of deals of 81.5% in 1998 and 19.5% in 1999.

These figures follow first-half trends, in which the number of announced transactions dropped 15% over the previous year’s period, and the value of the deals was 23% lower, excluding the $180 billion Time-Warner/AOL deal, according to Thomson Financial Securities Data.

Why the growth slowdown? Several reasons.

Increased regulatory scrutiny and a tighter lending environment are the two prime suspects. However, this powerful one-two punch only landed a glancing blow on the telecom and technology sectors, which accounted for 60% of deals announced in the third quarter.

Why? In those sectors, “it’s either merge or go out of business.,” says Bob Kipps, senior vice president at Houlihan, Lokey, Howard & Zukin, an international investment bank that advises middle-market firms. “Telecommunications firms that need huge blocks of capital to build networks and business-to- business Web sites with unproven business models are looking to do deals.”

Tech-sector deals tend to rely heavily on stock, which, coupled with recent Nasdaq drops, helps explain the lack of growth in overall deal value, notes Riccardo Benedetti, a vice president at Morgan Stanley Dean Witter. However, such deals may be necessary for the operational as well as financial health of companies, he says, adding, “I think the strategic rationale for many of these players is still there.”

Morgan Stanley Dean Witter completed 197 global deals worth $808 billion in the first half of 2000, according to Thomson, coming in second to Goldman Sachs’ 169 deals valued at $901 billion.

Deal valuations dropped particularly low in the dot-com sector. Companies spent about $9 billion to acquire dot-coms in the third quarter of 2000, a sliver of the $52 billion spent in the first quarter, according to Tim Miller, president of Webmergers.com, which tracks Web sites involving mergers. However, the number of deals per quarter has held steady [233, 245, 223, respectively], meaning average deal values fell from $200 million to $40 million over the year.

Miller says buyers tend to be established Internet players who want to enhance and expand existing services with some of the smaller start-ups. For example, he points out that America Online recently acquired iAmaze and Quack.com to upgrade the site’s graphics and audio capabilities.

Within the rising tide of cross- border deals, U.S. firms have seen more foreign buyers than ever before, but are no longer the world’s favorite targets, according to research by KPMG International. With $133 billion from foreign acquirers in the first half, the U.S. ranked second to Germany’s $209 billion.

And, as a cross-border buyer, the U.S. came in third place, spending $95 billion abroad to the U.K.’s $254 billion and France’s $113 billion, the research showed.

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