Magazine article Global Finance

A Tale of Two Industries: Energy, Finance Deals Proliferate for Very Different Reasons

Magazine article Global Finance

A Tale of Two Industries: Energy, Finance Deals Proliferate for Very Different Reasons

Article excerpt

CORPORATE FINANCING FOCUS

The volume of worldwide mergers and acquisitions totaled $730 billion in announced deals in the first quarter of 2008, a decline of 24.2% from the first quarter of 2007 and the lowest level for deal activity since the third quarter of 2006, according to Thomson Financial. The outlook is not entirely bleak, however, with a significant number of takeovers likely this year in the troubled financial services industry as well as in the booming energy sector.

The slowdown in M&A activity in the first quarter of this year was clearly related to the effects of the credit crunch on the availability of financing and the effects of volatile stock and bond markets, analysts say. Deal volume in the United States fell 51.1%, accounting for 26.8% of worldwide M&A volume, down from 41.6% of global transactions in the same period a year earlier.

Private equity firms were left largely on the sidelines during the first three months of this year due to the uncertain environment in the global credit markets, Thomson Financial said. The $81.3 billion in announced deals involving financial sponsors was the lowest since the third quarter of 2005.

"While objectively there has truly been a slowdown in M&A activity, particularly in the private equity world, this should be put in perspective," says William Kucera, partner at Chicago-based Mayer Brown, who represents buyers and sellers in acquisitions and divestitures. "The recent past was a statistical outlier, with the highest volume of deals on record," he says.

Opportunities for Buyers

A significant number of deals are still getting done, particularly those involving strategic buyers with good balance sheets and cash reserves, according to Kucera. Private equity firms are still doing deals as well, but the transactions are not as big as they were a year ago, he says. "The middle market is still relatively strong," he points out. "If you are a well-positioned buyer, there are opportunities."

Two industries that will continue to have a large volume of M&A transactions this year are finance and energy, but for completely different reasons, Kucera says. In financial services, deals are being done out of necessity, whereas in the oil and gas industry, where companies are making a lot of money, they are buying assets at inflated prices, he says.

Meanwhile, sovereign wealth funds, such as the Government of Singapore Investment Corporation and the Kuwait Investment Authority, took significant stakes in US banks, including Citi and Merrill Lynch, in the first quarter of 2008 and are likely to make additional investments.

The number of sovereign wealth funds has surged, as Asian nations and oil exporters in the Middle East seek higher returns on their massive currency reserves by taking stakes in companies. The funds have assets of about $3 trillion, and Morgan Stanley forecasts that their holdings may quadruple by 2015.They more than doubled their global M&A spending last year with acquisitions of companies and minority stakes of more than $60 billion.

Sovereign wealth funds could take up some of the slack in the market caused by the slowdown in the private equity industry. They take a longer-term view of investing and are not affected by changes in the credit cycle. These funds accounted for more than one-third of global M&A in 2007.

Hedge Funds Are Targets

Hedge funds have increasingly become takeover targets. Sales of alternative investment firms, the majority of which were hedge funds, accounted for a record 40% of deals in the global investment management business in the first four months of this year, according to Jefferies Putnam Lovell, a division of New York-based investment bank Jefferies.

"We expect record demand for alternative asset managers to continue throughout 2008, motivated by buyers' search for absolute returns and innovative products in challenging capital markets," says Aaron Dorr, managing director at Jefferies Putnam Lovell. …

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