Still Dealing in Doubt

Midsize acquisitions dominate, as lack of confidence in the economy lingers.
Vincent RyanOctober 26, 2011

Last week companies announced 47 merger and acquisition deals worth $56 billion. But that healthy value number was largely due to one deal, Kinder Morgan’s purchase of El Paso, a natural-gas transmission provider, for $34.7 billion in cash and stock. That deal was an anomaly — this autumn, double-digit billion-dollar deals have been slightly less scarce than blockbuster IPOs.

More typical are deals of $2 billion and under, such as Oracle’s purchase of cloud-computing provider RightNow Technologies on October 24; Mattel’s October 25 acquisition of HIT Entertainment, owner of the rights to the Thomas the Tank Engine toy franchise, for $680 million; and J.M. Smucker Co.’s October 25 agreement to buy the foodservice coffee and hot beverage business of Sara Lee for $400 million.

After the M&A market skid in July from equity-market volatility, a return to relative stability in stocks in September is bringing strategic acquirers back into deal making, says Bob Profusek, global head of M&A at law firm Jones Day. But M&A is dominated by middle-market targets right now. “Acquirers are hitting solid singles and stand-up doubles and not many home runs,” says Profusek. “There will be strategic deals, accretive to the buyer, and deals that when they’re announced you say, ‘That makes sense.’”

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So the $400 million to $2 billion space will continue to be very active. But until the European debt crisis is resolved in some way and the United States tackles some of its fiscal problems, large, transformative deals will be rare.

“The reason guys in my business like big deals, which require more complex financing, is they are a manifestation of a more-positive attitude in CEOs and boards of directors,” Profusek says. “Everybody involved has some level of confidence in the future.” Midsize deals from large corporates “don’t turn direction for any of these buyers; they are add-ons,” he says. “They are not deals that you have to be confident in your future to do.”

Profusek doesn’t think November will see a flurry of deal making, “but a Monday like last Monday [October 24] is a pretty good Monday.”

So far in 2011, there have been 3,474 deals, with a total disclosed value of $990.2 billion, according to data provided to by mergermarket. That compares with more deals — 3,695 — with a lower total value disclosed — $864.6 billion — at this time in 2010.

There were five North American deals that exceeded $1 billion in value last week, in addition to the El Paso purchase.

A consortium of private-equity investors bought 35% of Santander Consumer USA, an auto-financing company. In another bank deal, The Bank of Nova Scotia agreed to buy a 51% stake in Banco Colpatria Red Multibanca Colpatria SA, a Colombian-based bank, for $1.01 billion.

In energy, Austin, Texas-based Brigham Exploration agreed to a takeover by Norwegian corporation Statoil ASA. Statoil said the $4.5 billion deal gives it access to “a premier U.S. conventional oil company.” And Amerigas Partners, a propane distributor, bought Heritage Operating and Titan Energy Partners for $2.9 billion.

Finally, U.K.-based private-equity firm Permira agreed to acquire Genesys Telecommunications Laboratories from Alcatel-Lucent. Daly City, California-based Genesys provides customer-service software and contact-center solutions. The deal generates $1.5 billion in cash for Alcatel-Lucent, which has been hawking noncore assets. The deal is Permira’s largest in two years, and will be reviewed by the Committee on Foreign Investment in the United States (CFIUS).