NOTE: A NEWER ARTICLE HAS BEEN PUBLISHED (7/6/2011) • 2011 Mid-Year Mergers & Acquisitions Update and Outlook.
In 2010, corporate merger and acquisition (M&A) activity made a huge comeback. Most of the M&A activity involved North American companies, but activity has also increased around the world, and in various market sectors / industries. Companies have stashed away a record amount of cash, which they have hoarded since the height of the financial crisis (2008-2009) when cash was considered king. Acquiring companies have been spurred on by record low interest & lending rates, as well as a North American economy which has been considered as “stabilized”. Risk in general, has been perceived to be lower than during financial crisis, and there has been an increase in corporate and investor confidence. Even though stock prices were a lot higher in 2010 than in 2008 or 2009, the market value of companies have still remained relatively low due to a weak global economy.
M&A activity significantly increased during the second half of 2010 especially for large sized (multi-billion dollar) takeovers. Late July, the month of August, and September, were notable for heavy merger & acquisition activity. Those months were highlighted by the announcements of :
• 7/22/2010 – General Motors [GM] – AmeriCredit Corp ($3.5 billion).
• 7/29/2010 – Sanofi-Aventis [SNY] – Genzyme [GENZ] ($18.5 billion).
• 8/14/2010 -BHP Billiton [BHP] – Potash Corp [POT/tse:POT] ($40 billion).
• 8/19/2010 – Intel [INTC] – McAfee [MFE] ($7.7 billion).
• 9/2/2010 – Goldcorp [GG/tse:G] – Andean Resources Ltd [tse:AND] ($3.4 billion).
• 9/17/2010 – Johnson & Johson [JNJ] – Crucell [CRXL] ($2.3 billion).
• 9/27/2010 – Unilever Plc [UL] – Alberto Culver [ACV] ($3.7 billion).
Takeovers have continued and also increased after September to the end of the year with no let down in activity. We expect conditions to continue that make mergers & acquisitions very attractive for companies in 2011.
2011 Financial, Insurance, and Investment Sector M&A Outlook
The M&A activity in the US financial, insurance, and investment sectors can be expected to slow or remain at same pace in 2011. The massive mergers have already occurred in 2008-2009 during the height of crisis. In 2010, there were a significant number of smaller deals made by the stronger US financial companies/banks. In particular, Wells Fargo [WFC], Umpqua [UMPQ], and US Bancorp [USB], had all completed several smaller deals (both financial institutions and insurance businesses) that went relatively unnoticed during 2009-2010. One of the larger exceptions last year was the Berkshire Hathaway [BRK.A/BRK.B] and Sun Life Financial [SLF/tse:SLF] reinsurance deal ($109 billion). The reason there may have been less deals, may have been due to the operations of small financial companies being acquired via the Federal Deposit and Insurance Corporation (FDIC) facilitated transactions, and therefore they were not really considered traditional/conventional M&A deals by many.
In 2011 we can expect that most M&As will still be the smaller sized financial deals, such as the FDIC facilitated acquisitions. We expect small and regional financial firms to continue being seized by the FDIC. Conditions likely to affect/limit the ability of the larger financial firms to complete large mergers and takeovers are the Vockler and Basel III rules, as they are more strict. Firms won’t be willing to make bold takeovers without being more cautious, or unless they are confident enough in their financial strength. We can also expect small and mid sized insurance and investment management deals to continue roughly at same pace as in 2010 . Furthermore, it is important to note that entire take overs may be less likely in these two sectors, giving way to takeovers of certain units or divisions. The US economy is still very weak with an extremely high unemployment level, that hasn’t really declined since the height of the crisis. Sustained job creation over many months has yet to be seen, and US consumers still have trouble repaying debts. These will be the major conditions affecting the financial, insurance, and investment sectors. The negative conditions foster uncertainty, weakened market values, and lasting risk concerns, which give way to takeovers by stronger companies (either through conventional means or FDIC facilitated acquisitions).
The financial sector M&A activity by Canadian companies is expected to continue in 2011. However, it will be in lower numbers compared to those made by US corporations (due to far fewer Canadian companies relative to the US). The Canadian financial sector has been stronger than most developed nations, and financial institutions in Canada also have much more cash. In recent months The Bank of Nova Scotia [BNS/tse:BNS], Toronto-Dominion Bank [TD/tse:TD], and Bank of Montreal [BMO/tse:BMO] announced acquisition deals:
• 11/22/2010 – The Bank of Nova Scotia [BNS/tse:BNS] agreed to acquire all shares of DundeeWealth Inc [tse:DW] ($3.2 billion).
• 12/7/2010 – Toronto-Dominion Bank [TD/tse:TD] agreed to acquire Chrysler Financial, the auto lender owned by Cerberus Capital Management ($6.3 billion).
• 12/17/2010 – Bank of Montreal [BMO/tse:BMO] announced it was buying Marshall & Ilsley Corp [MI] ($4.1 billion).
In 2011, other Canadian financial institutions may feel need to make a deal to increase its global market share. In addition, a strong Canadian dollar will help in deal making. On December 31st 2010, the Canadian dollar had a value of 1.0042 USD. Factors that would influence or limit acquisitions by Canadian financial companies would include a widening trade gap (widen to significant levels), year end household debt levels that rose to 144% of disposable income, and interest rates that are expected to rise in 2011 (which will put pressure on the Canadian economy and households).
2011 Commodities M&A Outlook
Worldwide demand for commodities will continue to increase in 2011 and the following years, as the global population grows, currencies devalue, national debts increase, and massive inflation looms. Demand for commodities from developed nations, and especially from emerging markets will contribute to the huge increase. We expect further consolidation, and M&A activity to increase significantly in the commodity industry in 2011. Much of the activity in particular will be in the minerals used for fertilizers, oil & natural gas, and mining (metals) industries. Small, mid, as well as a large-sized deals can be expected given the present conditions. The majority will be larger companies taking over the smaller juniors, with other deals being mergers of equals.
Foreign takeovers of smaller Canadian companies are likely to occur more frequent than companies from any other single nation. Canada is extremely rich in natural resources related to energy (coal, oil, natural gas, uranium, etc), as well as in metals, and fertilizer related minerals. Some examples of smaller Canadian companies taken over in 2010 include the following:
• 1/28/2010 – BHP Billiton’s [BHP] acquisition of Athabasca Potash Inc. (API), with a total equity value of approximately $341 million CDN ($320 million USD).
• 8/14/2010 – BHP Billiton’s [BHP] announced intention to acquire all outstanding common shares of Potash Corporation of Saskatchewan Inc. [POT/tse:POT] at a price of US$130 per share (approximately US$40 billion), which was eventually rejected by the company and the Canadian government.
• 11/22/2010 – European fertilizer giant K+S Group’s $434 million takeover of Potash One Inc [tse:KCL].
It can be expected that the large commodity giants from developed nations will be very active on the merger & acquisition front this year. Larger companies (both public/private and state-owned) from BRIC nations (Brazil, Russia, India, China), especially Russia, China, and Brazil, will likely be ones that will acquire smaller companies, rather than be acquired.
During the past week, as this article was being edited, M&A activity had already increased. Canadian copper miners Inmet Mining Corp [tse:IMN] and Lundin Mining Corp [tse:LUN] agreed to a huge $9 billion merger, creating a global copper powerhouse. On January 11, 2011, Cliffs Natural Resources Inc. [CLF] announced it will acquire Consolidated Thompson Iron Mines Limited [tse:CLM] for $4.9 billion CDN. Junior mining companies with good potential of being takeover targets include those with both promising exploration results and prospective land packages that are neighbouring larger companies.
In the energy sector, the demand for the various resources used to generate and store it will increase along with energy usage. This will cause the price of the related commodities (oil, natural gas, lithium, uranium, natural gas, copper, etc) to increase across the board and continue for the next few years. As a result, energy related M&A deals will also continue to heat up in 2011. Not only will we see mergers & acquisitions, but also more joint ventures. Last year (December 17, 2010) France’s Total S.A. [TOT] announced a $1.75 billion CDN partnership with Suncor Energy [SU/tse:SU] in Canada’s oil sands. Alberta’s oil sands are seen as the world’s largest source of potential crude oil outside of the Middle East. In recent years, billions of dollars have been invested into the area, which has been targeted by the global oil industry.
2011 Biotechnology, Pharmaceutical, and Health Care Sector M&A Outlook
There has been more M&A activity in the biotechnology, pharmaceuticals, and health care sectors during 2008-2009, but slightly less in 2010. However, the big M&A deal to watch in 2011 will be the outcome of Sanofi-Aventis [SNY] and Genzyme [GENZ]. Most large companies in the industry have already completed many multi-million and multi-billion dollar deals within the last 2 years alone. This includes names such as Merck, Wyeth, Schering-Plough, Sanofi-Aventis, AstraZeneca, Johnson&Johnson, Bristol-Myers Squibb, GlaxoSmithKline, etc. These acquisitions ranged from small, mid, to large sized companies in a wide range of industries including consumer, health, generics, animal health, vaccines, diabetes, cancer, etc. Many joint ventures have also been completed as well. Despite the busy M&A activity in recent years, it can be expected that further consolidation and joint ventures continue at a fairly moderate pace in 2011 and beyond. Many large companies have hoards of cash, and will likely spend it on small to mid-size deals/companies. The Sanofi-Aventis and Genzyme deal may be the largest deal of the year in the industry. Potential takeover targets include smaller highly specialized niche players, with good research pipelines, but also lack financial muscle or production expertise. Specialized niche areas include vaccines (highly sought after in recent years), cancer, diabetes, gene therapy, rare/infectious diseases, etc. We can also expect smaller generic manufacturers to be takeover targets as the larger companies try to diversify, seek downside protection from expiring drug patents, and limit the negative financial impact of other larger generics.
2011 Real Estate M&A Outlook
In real estate, it is likely that the increase in activity will be moderate compared to 2010. Most deal making in this sector by the larger players have already occurred in the last 3 years. It is expected that the majority of real estate deals in 2011 will not consist of entire takeovers, but of property portfolios. Two real estate companies to watch in particular are Brookfield Properties Corporation [BPO/tse:BPO] and Riocan Real Estate Investment Trust [tse:REI.UN] . They are among the strongest real estate companies in North America and have large reserves of cash. Both companies have made many acquisitions in 2010, including Brookfield’s acquisition of a portfolio consisting of 16 Australian properties, and Riocan’s US mall acquisitions. Both companies have indicated that they would continue to look for opportunities. It is very likely that they will continue in 2011 and take advantage of lower lending rates, weakened competitors, and low real estate valuations.
2011 M&A Outlook For Other Sectors
In general, we can expect M&A activity to increase across most industries (food, real estate, retail, technology, consumer, etc). M&A of companies in emerging markets by those in wealthier developed nations is expected to increase in 2011, as capital inflows into emerging markets continue to increase. With low interest rates, those in developed countries will seek higher rates of returns and high growth markets. Markets in developed nations are becoming mature and saturated, compared to the robust growth in developing nations. Nations of interest for takeover targets include India, China, Brazil, Argentina, Mexico, and some Eastern European countries like Czech Republic, Russia and former USSR nations. However Brazilian companies, as well as private/public/state-owned Chinese and Russian companies, are also likely do takeovers of their own.
It is important to note that one issue that we expect to see more of, that will limit larger foreign takeovers in general, are the protectionist and national interest issues that have emerged. In Canada, we’ve seen the government’s rejection of BHP Billiton’s [BHP] $38.6 billion hostile takeover of Potash Corp [POT/tse:POT] in 2010, and Alliant Techsystems Inc’s [ATK] friendly $1.32 billion takeover of Macdonald Dettwiler & Associates Ltd [tse:MDA] in 2008.
This article only touches on a few issues, but it should help investors as a starting point with their own research and analysis. It is important to note that this article is meant to outline conditions which are likely to affect M&A activity in the sectors/industries mentioned. Keep in mind the information in this article is not meant to be a set of predictions. It is meant as a discussion of highly probable scenarios of what we can expect to see happen, based on the information available today. By knowing the likely possibilities, we can plan for them. We can also capitalize on potential opportunities, and will not be caught off guard by possible negative events. Investors should also remain flexible in their view & outlook, and change it as the influencing conditions change.
DISCLOSURE: I hold shares of Sanofi-Aventis, Johnson & Johnson, Wells Fargo & Co, Umpqua, US Bancorp, Berkshire Hathaway, Brookfield Properties Corporation, and Riocan REIT .
UPDATE: List of 2010 year-end summaries & 2011 outlooks:
• 12/22/2010: 2010 Year-End Market Summary
• 12/26/2010: 2011 Bond Market Outlook & 2010 Review
• 1/7/2011: 2011 Currencies Outlook & 2010 Review
Thanks & Happy Investing! — The Investment Blogger © 2011