Dealmaking back in fashion, as CEOs buy growth

Davos, Switzerland–The manic dealmaking of the years before the financial crisis may be some way off, but acquisitions were certainly back on the agenda for the CEOs of many companies attending the World Economic Forum in Davos over the past week.

Savage cost cutting, capital raising and debt refinancing mean that a lot of the more profitable companies now have strong enough balance sheets to be opportunistic if a deal is presented. The debt markets are also open again to help finance deals, and market gains mean their shares can be used as currency in transactions.

Buying growth through purchases may also be more attractive than trying to expand current businesses organically, given concerns about how fast the economies of Europe and the United States will recover this year.

But the CEOs are generally looking for bolt-on acquisitions, not massive deals that transform their businesses.

Take Mike Fries, for example. As chief executive of pay-TV company Liberty Global he is eager to expand beyond the 15 million subscribers Liberty has across ten countries in Europe.

"We are opportunistic on the M&A front," Fries said. "If something came up that fits us perfectly we would have to look at it."

He said that the strength of high-yield debt markets was fueling such activity. It took less than two days for the company to raise enough money for the US$3 billion acquisition of Germany’s Unitymedia at the end of last year.

Also in the media sector, Thomson Reuters Corp CEO Thomas Glocer said the company was in a strong position to make acquisitions, thanks in part to its opportunistic refinancing of debt over last summer. Glocer said there was "a ton" of good businesses coming onto the market.

TD Ameritrade Holding Corp, the second-biggest US discount broker, has been a major consolidator of the industry with ten deals in about as many years, and its chairman, Joe Moglia, made it clear that was going to continue.

"Literally every day we are trying to look at different opportunities in the market place," he said, and that included eyeing any of its rivals if they come up for sale. "There is probably still some room left in the industry for consolidation," Moglia added.

Placing bets

Kraft Foods Inc’s US$18.7 billion deal for Cadbury was likely to make companies more confident as they consider big deals, said Mark Foster, group chief executive for management consulting at Accenture.

"Cost cutting and responding to the economic realities remains top of mind for companies, but there are some leading companies that are lifting their heads and starting to place bets," he said.

The heads of three of the biggest private equity companies in the world, Stephen Schwarzman, Henry Kravis and David Rubenstein, made it clear in interviews at Davos that they expect to do more acquisitions. They will also be seeking to sell more of their current holdings through initial public offerings or straight sales to companies.

And deals are not just about bankers’ fees and executives’ egos. They also create business activity, boosting airlines, hotels and restaurants–as investment bankers, investors, consultants and auditors take to the road.

"The IPO activity and the canceled projects from last year that are being restarted, the negotiations for things coming up have created a pretty spontaneous increase in demand," said Frits van Paasschen, the CEO of luxury hotel chain Starwood Hotels & Resorts Worldwide Inc.

Brazilian and Chinese companies, bolstered by the relative strength of their economies, are also set to make a significant contribution to the dealmaking.

Brasil Foods, Brazil’s biggest pork and poultry producer, is looking for ways to expand around the world, said its co-chairman, Luiz Fernando Furlan. The company was only formed last year after Perdigao took over Sadia–a transaction still awaiting regulatory approval in Brazil.

"We have plans to invest outside, maybe the US and the Middle East and some other places," he said while declining to be specific on particular targets.

Protecting staff

Former Deputy US Treasury Secretary Robert Kimmitt said the political climate in the United States was positive toward inbound investment by the Chinese and others.

"We haven’t seen the barriers to investment–investment protectionism–as much as we have seen trade barriers rise," said Kimmitt, who is now chairman of Deloitte’s Center for Cross Border Investment.

Still, there are some companies that will not be making M&A fees for the bankers.

Jim Goodnight, the founder and controlling shareholder of business software company SAS, said he would not sell because he fears that a buyer would just gut the company’s workforce and culture–a culture that made it No. 1 in the latest Fortune magazine list of top 100 American companies to work for.

"I am not interested in selling the company because I really like to try and protect the people that work here and one of the first things an acquiring company does is lay off people, terminate people," he said.

Related Articles

Back to top button