Mergers and acquisitions picking up the pace as companies look globally for growth

After a dismal and deal-starved 2009, the head of the mergers and acquisitions practice at the Minneapolis-based law firm Faegre & Benson declared, “For the first time in a long time, I feel a sense of optimism.”

Speaking at the annual Faegre & Benson M&A Conference in downtown Minneapolis recently, Bruce Engler told about 360 Midwest corporate dealmakers and investment bankers that “we’re certainly not out of the woods yet, not by a long shot, but the deal market is definitely improving.”

He sees lots of Midwestern companies looking for growth opportunities outside the United States. Coming off a “terrible” first half of 2009, the regional M&A environment strengthened the last half of the year and continued into early 2010, Engler said. “I think Q4 is going to be really good,” he added.

Engler said he is surprised ”that pricing is as rich as it is” and attributes that to private equity firms with “short-fuse” dollars they need to deploy, as well as strategic corporate buyers looking for growth and willing to pay up, particularly in technology.

Echoing the upbeat sentiments, panel member Hugh Hoffman, managing director at Craig Hallum Group, noted that merger-and-acquisition activity topped $2 trillion globally, up 20 percent year to date and hit a respectable $600 billion in the United States, up 7 percent. After back-to-back double-digit declines of 19 percent and 27 percent, even a flat deal market would be welcomed news.

U.S. M&A Transactions

($ million)

% Change Y-o-Y

Source: Thomson Financial; Faegre & Benson (2010 estimate as of 9/22/2010)

Hostile acquisitions are “definitely rampant, “he added, growing 60 percent so far this year, to about $150 billion.

Hoffman sees fertile ground for continued M&A activity in the growing health care sector. He also is upbeat about consumer markets, as financial and strategic acquirers betting on an economic recovery pick up beaten-down retail and food companies. Technology plays are too pricey for financial buyers but still attractive for a strategic acquisition, he said.

Jon Salverson, vice chairman of investment banking at Piper Jaffrey, said the environment had “definitely improved.” But it is a “very small-deal marketplace” with 60 to 70 percent of transactions $50 million or less.

Bigger deals are coming back more slowly, he said, because the exotic-structured finance instruments that allowed investors to raise capital (and created financial havoc in the market meltdown) have dried up and “fewer lenders are willing to play” on the debt side.

“Globalization is a truism, never more so than today,” observed Matt Miller, editor at The Deal, an industry publication focused on M&A.

While acknowledging that European companies are looking for acquisitions, “the real action will come from Asia,” he said. “The Chinese are continuing their march” in search of natural resources, expertise and market access. “Then there’s India,” he added. “There are companies sitting on billions and billions of dollars, with valuations very high compared to American companies.”

Corporate dealmakers also spoke at the conference about what opens their eyes — and wallets.

“We’ve got to find new areas to grow our business over the next three, four, five years,” said Tim Quinn, senior vice president of corporate development at American Express. “We’re very, very focused on growth … (and will) pay a premium for that growth.” The financial services giant is focused on acquisitions that add innovative technologies that can drive new business growth, he said.

The recession “has added some reasonableness to sellers’ expectations,” observed Mark Copman, vice president of corporate development and M&A at 3M Co. As companies “also realize managing cash flow and managing growth is a lot harder in a  market that doesn’t go straight up, we’re seeing people coming to the table now [that] we had discussions with previously where their expectations were not reasonable. Now we’re able to have discussions.”

It would seem 3M is having more than just discussions. So far this year, the Maplewood-based conglomerate has announced 10 acquisitions, after having done only three all of last year.

More than $1 trillion in cash is sitting on the balance sheets of U.S. non-financial corporations, and much of that cash is being used to buy back stock or acquire other companies, rather than hire additional workers to build out their existing business. The focus on M&A activity at the expense of employment growth has been noted widely and criticized.

And a recently released study found that research and development spending at 1,000 major companies globally declined last year for the first time in more than a decade.

In a survey of published financial data, management consulting firm Booz & Co. found sample companies spent $503 billion on R&D, down 3.5 percent from 2008. But in the depths of the global recession, R&D spending rose as a percentage of total revenue to 3.8 percent, up from 3.5 percent in 2008.

3M Co., for one, is reversing that trend so far in 2010. The company cut its R&D spending 7.8 percent, from $1.394 billion in 2008 to $1.285 billion last year. For the first nine months of 2010, 3M has invested $1.046 billion, or 16.5 percent of revenue, growing R&D spending 9.1 percent from the same period a year earlier.

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