Mendoza School of Business

Let’s make a deal: M&A activity on track to advertisement hit record this year

Published: December 5, 2006 / Author: Matt Krantz

If 2006 doesn’t end up as the year of the deal in the USA, it won’t be for lack of effort on Wall Street’s part.

Monday, Bank of New York said it is paying $16.5 billion for Mellon Financial, and LSI Logic said it is buying chipmaker Agere for $4 billion.

Neither deal by itself might seem a blockbuster. But each comes on top of a mountain of mergers and acquisitions in 2006 that has pushed the announced value of M&A in the USA up to $1.4 trillion, just shy of the U.S. record of $1.5 trillion in 2000, Dealogic says. Global M&A already is at a record this year at $3.6 trillion.

Monday’s deals fit well in the 2006 action because they involve two of
the five heaviest industries for M&A: finance and technology. The trends underneath this year’s deal binge show the targets have shared other
similar attributes, including:

•Bargains among yesterday’s dogs. Tech and telecom have become prime targets. More than $190 billion in deals have been announced for U.S. telecom companies, a sum exceeding what’s been spent in any other industry, Dealogic says. Meanwhile, the purchase of 1,264 technology firms has been announced, including Agere on Monday, putting the industry at the top for sheer number of deals.

Regular investors may still have bad memories from their experiences with tech and telecom stocks after the bubble burst in 2000. But savvy buyers have been taking the opportunity to scoop them up. Tech and telecom have roared back into the forefront of large investors’ attention after being treated like pariahs for years. “These guys are coming back,” says Tim
, finance professor at Notre Dame.

•Private-equity bait. Now that private-equity investors account for 25% of the dollars spent on mergers, Dealogic says, industries with traits that appeal to these well-heeled investors rank high on the leader board. Real estate investment trusts, which generate large amounts of cash and have favorable tax treatment, are the second-biggest target after telecom. “Private equity has a ton of money to spend,” says Abigail Roberts, editor of merger tracker Mergermarket North America. Three of the five biggest REIT buyouts this year have been by private-equity firms.

•Midwestern industrials. While buyouts of firms on the two coasts tend to get the attention, industrial companies in the Midwest have been targeted in more deals than any other geographic segment, Mergermarket says. Much is due to consolidation in the auto industry, Roberts says, as larger players try to get bigger to survive.

If stock prices keep moving higher and give companies currency to go on the M&A hunt, expect the merger boom to keep brewing for the same types of companies, Loughran says. “If valuations go higher, we could break all sorts of records,” he says.



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