Bargain-M&A Exceptions Prove the Rule

An Abbott Labs deal in the works, and a Morgan-Citi brokerage combination in the rumor mill, underscore the rarity of global transactions. KPMG's s...
Stephen TaubJanuary 12, 2009

Global merger-and-acquisition activity as this week has started underscores the kind of bargain-hunting deal likely to occur more frequently in the financial crisis, as traditional financial and strategic transactions remain in sharp decline.

In the health care industry, Abbott Laboratories announced on Monday that it would acquire Advanced Medical Optics for $22 per share, or $2.8 billion in cash, including estimated net debt, in a deal that would boost its presence in the eye-care market. The price represented a 148 percent premium to AMO’s closing stock price on Friday. AMO stock traded as low as $2.88 last year.

“Abbott is enhancing and strengthening its diverse mix of medical device businesses and gaining a leadership position in another large and growing segment,” said Miles D. White, Abbott’s chairman and CEO.

Also, Morgan Stanley is reportedly in talks to merge its brokerage unit with the Smith Barney brokerage unit from Citigroup, which is looking to boost its balance sheet. Experts expect a definitive deal to be announced later this week. They also expect the pact to spawn other deals in the financial services industry, either for units of larger companies or outright acquisitions.

These deals appear to some observers to be exceptions, however. KPMG Corporate Finance’s Global M&A Predictor on Monday forecast that 2009 would see a continued fall in global mergers and acquisitions. It does, however, expect deal activity to slowly return late in the year as liquidity improves and attractive value is recognized in certain sectors.

“We expect global deal volumes to continue to fall through to Q3 and, with less liquidity in the market and reduced debt market liquidity, appetite and capacity for doing deals will continue to decline,” said Stephen Barrett, corporate-finance international chairman at KPMG. “However, our detailed analysis of the results of KPMG’s Predictor, coupled with historic M&A cycle trends, leads us to believe that there are indications that the corner may well be turned late in the second half of this year.”

As valuations continue to decline, the prospects for bargain-shopping rise around the globe.

According to the Predictor’s a survey of 1,000 companies, the estimated net debt to EBITDA ratios and prospective price-earnings ratios in various regions of the world indicated a declining valuation trend around the globe. The region with the biggest drop in valuation was Africa and Middle East, where price-earnings ratios are down 31.6 percent, from 13.3 times earnings to 9.1 times. Latin America had the second largest fall, followed by North America, down 24.6 percent down from 15.9 times to 12 times.