Global M&A at Lowest Level Since Mid-2010

December 29, 2011, 6:34 AM EST By Serena Saitto

Dec. 29 (Bloomberg) -- The value of global takeovers dropped to the lowest level in more than a year this quarter, and dealmakers say Europe’s debt crisis may hamper a recovery in 2012 as cash-rich companies hold off on major purchases.

Mergers and acquisitions have slumped 16 percent from the previous three months to $457.1 billion, putting the fourth quarter on course to be the slowest since at least mid-2010, according to data compiled by Bloomberg. For the year to date, announced takeover volume has risen less than 3 percent to $2.25 trillion after regulatory hurdles scuttled AT&T Inc.’s bid for T-Mobile USA, which would have been 2011’s biggest deal.

Tightening credit markets, the risk of a euro-zone collapse and stock-market swings have deterred companies from pursuing transformational deals that would spur sales growth, M&A bankers said. Earlier in 2011, more favorable conditions emboldened acquirers to part with stockpiled cash, such as Johnson & Johnson’s $21.3 billion bid for Synthes Inc. and Express Scripts Inc.’s $29.1 billion offer for Medco Health Solutions Inc.

“There’s definitely pent-up demand for M&A as well- capitalized companies continue to focus on opportunities for strategic acquisitions,” said Yoel Zaoui, co-head of global M&A at Goldman Sachs Group Inc. “The key driver for M&A, however, is confidence, and in Europe, at the moment, that is lacking.”

Seven of the year’s 10 biggest deals were announced before August, when European markets fell the most since October 2008 amid a global stock rout and Standard & Poor’s cut the U.S. credit rating. Goldman Sachs is the top adviser on global takeovers for 2011, with $537 billion of deals this year, followed by JPMorgan Chase & Co. and Morgan Stanley, Bloomberg data show. This year’s growth in M&A volume compares with a 24 percent jump in 2010.

‘Wait and See’

Europe’s financial crisis will stifle lending, push the region into recession and weigh on the U.S. economy through early 2012, Jan Hatzius, Goldman Sachs’s chief economist, said on a Nov. 30 conference call. The euro zone’s unemployment rose to 10.3 percent in October, the highest since the currency began in 1999.

As the European crisis deepened, “dealmakers entered a wait-and-see mode, and that’s where we are now,” said Paul Parker, global head of M&A at Barclays Plc in New York. “Offsetting forces such as companies’ cash piles and low valuations should drive the recovery of M&A activity in the second half of the year.”

The MSCI World Index of about 1,600 companies trades for 12.6 times reported earnings, showing equities in developed economies are cheaper than they’ve been more than 95 percent of the time since 1995, according to data compiled by Bloomberg. Those companies are also sitting on $5.3 trillion in cash, the data show.

Antitrust Hurdles

Companies that did tap funds this year may not be able to complete their purchases as regulatory scrutiny threatens to derail more takeovers. Express Scripts’s offer for Medco, which would create the largest U.S. manager of pharmacy benefits for employers, insurers and union health plans, has prompted state inquiries over whether the combination would command too much market power.

AT&T abandoned efforts to buy T-Mobile USA from Deutsche Telekom AG this month after the U.S. Justice Department sued the companies in August, saying a combination would substantially reduce competition. Companies contemplating similar deals may hold off until the next presidential election in the hope that a Republican White House would make it easier to win approval for big transactions, said Jeffrey Silva, a Washington-based policy analyst with Medley Global Advisors.

European Deals

Deutsche Boerse AG and NYSE Euronext this week delayed the deadline for completing their merger until March 31 as the exchange operators try to persuade European Union regulators to approve the deal. While the U.S. cleared the combination, the EU has told the companies that concessions they offered to allay antitrust concerns don’t go far enough, two people familiar with the talks said this month.

Dealmaking involving European companies rose 2.2 percent this year, bolstered by the first half. For the fourth quarter, announced volume sank 14 percent from the previous three months to $161.4 billion. Valuations have also dropped, making the MSCI Europe Index even cheaper than the MSCI World Index at 10.8 times earnings. That may create opportunities for buyers from nations such as China.

“Chinese companies have been very successful at buying natural resources in emerging markets, and they are now very supportive of buying industrial assets in Europe,” said Thierry d’Argent, global head of M&A at Societe Generale SA in Paris.

Asia Pacific

French dairy-product maker Yoplait and the aviation unit of Royal Bank of Scotland Group Plc both attracted interest from Chinese bidders this year, according to people with knowledge of those negotiations.

The value of acquisitions involving Asia Pacific companies rose 3.8 percent to $698.4 billion this year, according to Bloomberg data. The biggest deal was Nippon Steel Corp.’s proposed takeover of Sumitomo Metal Industries for about $22 billion, including debt. That was followed by BHP Billiton Ltd.’s purchase of Houston-based oil and gas explorer Petrohawk Energy Corp.

Foreign buyers also spent more on Asia Pacific in 2011 than any year since 2007, according to the data. The largest overseas bid was SABMiller Plc’s $10 billion takeover of Australian beer maker Fosters Group Ltd., the data show. Among Asian countries, Japan overtook China as the biggest acquirer of foreign assets for the first time since 2008 after the March 11 earthquake spurred companies to retrench.

Japan’s Takeovers

“Japanese industries had been shrinking, and companies needed growth drivers,” said Kenji Fujita, head of M&A advisory at Mitsubishi UFJ Morgan Stanley Securities Co., the Tokyo-based investment banking venture of Morgan Stanley and Mitsubishi UFJ Financial Group Inc. “The earthquake raised the urgency for that.”

Japan’s Kirin Holdings Co. bought Brazilian beermaker Schincariol Participacoes e Representacoes, and China Petrochemical Corp., or Sinopec, agreed to purchase a 30 percent stake in Galp Energia SGPS SA’s Brazilian unit.

Still, after a record-high volume of $161 billion in 2010, the volume of announced deals involving Brazilian companies tumbled to $98.3 billion this year as the Brazilian real strengthened while the country’s economy slowed.

“I’m glad to leave 2011 behind,” said Flavio Tavares Valadao, head of corporate finance at Banco Santander do Brasil SA, based in Sao Paulo. “Deals are difficult to make and companies are worried for the future.”

Brazilian Deals

Santander worked on Telefonica SA’s merger of its Brazilian fixed line unit, Telecomunicacoes de Sao Paulo SA’s with its mobile unit, Vivo Participacoes SA. The Spanish bank also advised Spain’s Iberdrola SA on the acquisition of Brazil’s Elektro Eletricidade & Servicos SA for 1.77 billion euros ($2.3 billion).

Dealmakers predict that technology, industrials, natural resources and health care will continue to be the sectors most actively consolidating, especially if European policy makers can prevent financial turmoil from spreading to more countries.

“Companies need to have more confidence that we aren’t going to have a break-up of the euro,” said Mark Shafir, global head of M&A at Citigroup Inc. “If you got that cleared up, then the first half of next year could be a lot better than the second half of 2011 has been.”

--With assistance from Aaron Kirchfeld in Frankfurt, Jeffrey McCracken in New York, Takahiko Hyuga in Tokyo, and Jacqueline Simmons and Matthew Campbell in Paris. Editors: Julie Alnwick, Jennifer Sondag.

To contact the reporter on this story: Serena Saitto in New York at ssaitto@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net

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2012: Biggest Web IPO Year Since ‘99

December 28, 2011, 5:03 AM EST By Lee Spears

Dec. 28 (Bloomberg) -- Facebook Inc. and Yelp Inc. are set to lead the biggest year for U.S. initial public offerings by Internet companies since 1999, testing demand for IPOs after investors lost money on Zynga Inc. and Pandora Media Inc.

With Facebook considering the largest Internet IPO on record and regulatory filings showing that at least 14 other Web-related companies are planning sales, the industry may raise $11 billion next year, according to data compiled by Bloomberg. That would be the most since $18.5 billion of IPOs in 1999, just before the dot-com bubble burst.

While surging sales growth may lure investors to Facebook, the biggest social-networking site, heightened stock volatility and Europe’s sovereign-debt crisis could temper the pace of global IPOs after a 38 percent decline in 2011. Even Internet companies may cut valuations for their offerings after Zynga, the largest developer of games for Facebook, and online-radio company Pandora slumped following share sales this year, according to researcher Morningstar Inc.

“Technology is still a place where you can get outperformance in terms of growth against a tepid market backdrop,” said David Erickson, New York-based global co-head of equity capital markets at Barclays Plc. “You might see more IPOs emerge if we get resolution in Europe or stability that makes investors more comfortable with the overall market.”

Global Performance

IPOs raised $155.8 billion in 2011, compared with $252 billion a year earlier, and U.S. initial offerings generated $38.8 billion, about 10 percent less than in 2010, Bloomberg data show. In Asia, IPOs this year have raised $79.2 billion, less than half the $176.5 billion last year, Bloomberg data show.

While funds raised in Europe rose for the year, they sank more than 95 percent since August from a year earlier after the worsening debt crisis and a cut to the U.S. credit rating sapped confidence in global markets.

Morgan Stanley took the biggest share of both U.S. and global IPOs for the second year in a row after working on initial share sales by Glencore International Plc, HCA Holdings Inc. and Michael Kors Holdings Ltd. Pen Pendleton, a spokesman for New York-based Morgan Stanley, declined to comment.

The bank also was the lead underwriter on Zynga and Pandora’s IPOs. The stocks’ declines following those public debuts may prompt greater scrutiny of valuations in 2012, said James Krapfel, an analyst at Morningstar in Chicago.

“Investors will take a harder look at the numbers going forward and need to see strong revenue and profit growth,” Krapfel said. Bookings, an indication of deferred revenue, at Zynga have increased more slowly this year, suggesting the company’s IPO price was too high, according to a Dec. 9 Morningstar report.

Zynga, Groupon

Zynga, which raised $1 billion in its IPO this month, has since fallen 2.5 percent after going public at a valuation three times that of rival Electronic Arts Inc., Oakland, California- based Pandora has plunged 36 percent since its June 14 IPO.

Facebook, based in Menlo Park, California, is examining a $10 billion offering that would value it at more than $100 billion, a person with knowledge of the matter said last month. Total sales at Facebook in 2012 may surge 52 percent to 62 percent from this year’s projected $4.27 billion through increased ad revenue, according to Debra Aho Williamson, an analyst at EMarketer. Industrywide, the display ad market may surge 24 percent to $12.3 billion this year.

Yelp, ExactTarget

“Tech offerings generally offer real growth, and investors get very excited when they can’t find growth in the broader market,” JD Moriarty, New York-based co-head of equity capital markets for technology in the Americas at Bank of America Corp., said at a briefing this month.

Yelp, the consumer-review website operator, and e-mail marketer ExactTarget Inc. both filed for IPOs in November. This year, 19 Internet companies generated $6.6 billion in U.S. initial share sales.

Glam Media Inc., a Web-advertising company that targets women, plans to make its first IPO filing by the end of the second quarter, people familiar with the matter said on Dec. 14. AppNexus Inc., the online-ad company backed by Microsoft Corp., may go public in late 2012, Chief Executive Officer Brian O’Kelley said in September. Companies like MobiTV Inc. and Eloqua Ltd., which rely on the Internet to distribute cloud- based software products to clients, may seek an additional $650 million, regulatory filings show.

Europe’s Woes

In Europe, the IPO market has “essentially come to a halt” as the sovereign-debt crisis spread from Greece to Portugal and Italy, said Mary Ann Deignan, New York-based head of equity capital markets for the Americas at Bank of America. In September, Siemens AG suspended an IPO of its Osram lighting unit and Spain pulled the initial public offering of its lottery operator as global stocks headed for a one-year low.

“There are companies that would like to go public, but are waiting for the right market environment to do so,” said Deignan, speaking at a briefing this month. “As long as policymakers and politicians control the headlines, Europe remains a challenge.”

RIB Software AG raised 145 million euros ($189 million) in February, this year’s biggest technology IPO in Western Europe. Yandex NV, owner of Russia’s most popular Internet search engine, raised $1.4 billion in a U.S. IPO in May, while VKontakte, the largest Russian social networking website, also may sell shares in New York next year, people with knowledge of the matter said in June.

Months Behind

“The IPO market in Europe is probably six months behind where we are in Asia and the U.S.,” Brad Miller, New York-based global co-head of equity syndicate at Deutsche Bank AG, said at a briefing this month. The first pickup of stock-sale activity in Europe may come as governments sell state-owned assets to the public through spinoffs, Miller said.

Still, even in Hong Kong, where growth from mainland China will spur demand, a busier calendar may not come until the second half, said John Lydon, co-head of Asia equity capital markets at Deutsche Bank.

Chow Tai Fook Jewellery Group Ltd. and New China Life Insurance Co. both fell on their first day of trading in Hong Kong this month after selling shares at or near the bottom of proposed price ranges. Others such as Perfect Shape (PRC) Holdings Ltd. pulled offerings.

Private-Equity IPOs

IPOs by private-equity firms have also dried up this year, with owners instead pursuing secondary offerings. Last month, firms including Bain Capital LLC, Carlyle Group and Thomas H. Lee Partners LP raised $613 million from selling shares in Dunkin’ Brands Group Inc., the doughnut chain they took public in July. This year, KKR & Co. and other investors generated $2.1 billion from secondary offerings of stock in Dollar General Corp., whose IPO occurred in 2009.

Private-equity firms seeking to unravel investments made during the record buyout boom from 2005 to 2007 may follow through with IPOs if markets stabilize, said Robert H. McCooey Jr., senior vice president of new listings and capital markets at Nasdaq OMX Group Inc. in New York.

“Given the right market conditions, there will certainly be some of those companies that will be looking to exit into the public markets,” McCooey said. Toys “R” Us Inc., backed by buyout firms including KKR, filed for an IPO in May 2010 and has yet to complete a sale.

Some technology companies have also held off. Travel- website operator Kayak Software Corp. filed plans for a $50 million IPO in November 2010. LivingSocial.com, which considered a $1 billion IPO earlier this year, instead chose to raise $400 million from private investors, people familiar with the matter said this month.

Hot Names

Many Web-focused companies that completed IPOs in 1999, such as EToys Inc. and Drkoop.com Inc., fell victim to the subsequent technology-stock collapse as shareholders abandoned the unprofitable ventures. The performance of new Internet stocks next year will show whether investors are ready to dive back into the Web, said Laurent Morel of Societe Generale SA.

“Technology IPOs are definitely the theme there, with lots of hot names like Zynga coming to the market,” said Morel, the Paris-based global head of equity capital markets. “But if you look at their performance, most of them are struggling. Next year will be the real test.”

--With assistance from Fox Hu in Hong Kong and Zijing Wu in London. Editors: Julie Alnwick, Jennifer Sondag

To contact the reporter on this story: Lee Spears in New York at lspears3@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; Jacqueline Simmons at jackiem@bloomberg.net

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