Feb 20 2014, 9:20am CST | by Forbes
Merger arbitrageurs used to have an easy calculus. When a big-time corporate takeover was announced they would go long the target, short the acquirer and pick up a few pennies on the dollar for their trouble.
These days the trade is going the other way, with corporate buyers being rewarded by Wall Street for having the gumption to use their cash for something beyond dividends and share repurchases. Take the example Wednesday morning, when Signet Jewelers raced higher after agreeing to pony up $1.4 billion for diamond-dealing rival Zale Corporation.
That followed Tuesday’s $25 billion deal between Actavis and Forest Laboratories, which juiced shares of both companies and drew raves from billionaire activist investor Carl Icahn, an agitator for change at Forest.
In January, Google shares rose the day after the company said it would shell out $3.2 billion for Nest Labs, the maker of smart devices for the home.
Rare is the corporate board or management team that wants to go out on a limb, though many would claim to follow the Warren Buffett philosophy of being greedy when others are fearful. The vote of confidence being given to acquirers in the most recent spate of deals is one more reason to expect that some of the hundreds of billions of dollars sitting on corporate balance sheets may be put to use in M&A this year.
Corporate takeovers can often be the equivalent of trades or draft picks in professional sports, meaning that it often takes years to determine whether a deal is a winner or loser. And even with many acquirers rallying on deal news in recent months, positive reception for corporate shopping sprees aren’t universal. Facebook certainly made a splash Wednesday, when it shelled out $19 billion in cash, stock and restricted shares to buy messaging service WhatsApp. But observers expressed reservations over the eye-popping price tag for such a young company. An initial 5% after-hours dip was followed by a decline when trading started Thursday with shares off a bit more than 2% in the first half-hour of trading.
An M&A boom has been something of a white whale for Wall Street in recent years, with predictions for a takeover surge coming like clockwork. This year is off to a decent start on that front, but even a year like 2013, with a nearly uninterrupted bull run, failed to inspire the flood of deals anticipated.
According to a note this week from data provider Dealogic, U.S.-targeted M&A volume tipped the scales at $266 billion through mid-February, the highest level to that point since $278.1 billion in 2000 and 12% ahead of last year’s $234 billion pace.
(There’s a caveat in the Dealogic figures though, as the number includes all targeted M&A volume. So two separate bids for Time Warner Cable — the $69.8 billion offer from Comcast the company agreed to in February and a $62.6 billion bid from John Malone’s Charter Communications announced in January – show up in the figures.)
A long-awaited run of mergers would also come at a time when heavyweight investors have a lot of ammunition. Activists like Icahn are in the middle of a string of mostly-successful pushes for corporate change and are taking on ever-bigger companies, demanding boards pull levers ranging from capital return to breakups to, yes, acquisitions.
Nelson Peltz sent a letter to PepsiCo Wednesday reiterating his desire for the company to split its drinks and beverage business, and in his initial pitch for the move last summer the billionaire said the snacks business should merge with Mondelez.
Elsewhere, Credit Suisse analysts suggested Wednesday that Wal-Mart Stores could “jumpstart” a push to add smaller stores to its roster by shelling out a few billion for Family Dollar.
A rallying stock market breeds an appetite for risk, from investors chasing returns or snapping up newly-issued IPOs and from corporations taking the plunge into dealmaking. Even after a shaky start to 2014, the S&P 500 is down just 1% year-to-date and so long as the companies doing the buying see their stock prices rewarded (for the most part) there will be one less hangup to keep cautious executives from opening their wallets.
Source: Forbes Business
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