U.S. stocks have enjoyed a steady advance this year, with particularly spectacular performance during the month of December. The month’s equity gains have been driven by a slew of positive news–including the unexpected decline in jobless claims.
The Labor Department’s first-time jobless claims reports continue to improve and show a promising downward trend, pointing to a slowing in layoffs. The unemployment data is very important; it’s further confirmation that the labor market is on the mend. If people really are going back to work, the current spending in the malls will continue long after this holiday season is over. That’s all the economy needs to give it the boost that will drive the Standard & Poor’s 500 Index to even higher levels in 2011.
Add to that the positive data on manufacturing and housing, and there’s a renewed confidence in the economy. The S&P 500 is now at a two-year high, and we have even seen one of the best barometers of consumer and business vibrancy–FedEx raising its profit forecast–give the market an additional shot of adrenaline. The bottom line is that good news is flowing and shares are rising.
This healing economic momentum is giving fuel to the accelerating growth or turnaround of many companies, from small cap to mega cap. During the recession and the months following, companies were hurt by a slowing business environment and depressed consumption. Now, the winds are in their favor and stocks look to be positioned to enjoy improved top-line growth and, thus, higher stock prices.
In looking at 2011, we should see a renewed flow of corporate mergers and acquisitions. The M&A market has already emerged from depressed levels due to the financial distress of the credit crisis, and is poised to see a wealth of deals next year. While there was certainly a lot of activity–and some big name deals–across various industry sectors in 2010, next year is when the transaction volume should really take off. In fact, a recent study from Thomson Reuters and Freeman Consulting Services concludes that the global market for M&A will surge 36% in 2011 to over $3 trillion.
Why will 2011 be a big year for M&A? The catalysts are growth, technology, cash and the economy.
For the past years, many companies have been dealing with depressed markets and hunkered-down consumers. The bounce back in growth–coming out of this recession–is much sparser this time around. For management looking to move top-line numbers, adding new business units or customers via a transaction is a way to improve growth projections.
While many companies, particularly industry leaders, spend increasingly on R&D, more and more, innovations are coming from firms focused on particular sectors. Such companies are very attractive, as buyers are looking for technology-based competitive advantage to leapfrog competitors.
The economy has been rough on most, but a number of companies with strong cash flow have continued to see their bank accounts grow and are now sitting on huge balances. Those companies enjoy stock prices that have significantly more buying power now that their shares have recovered, and some are even trading at multi-year highs.
The Obama administration has recently been pushing for businesses to use the $1.9 trillion in untapped corporate cash to help jump-start the recovery. President Obama would like to see that money used for hiring and organic growth strategies. Excess cash, however–like the extra dollars in your wallet–often finds a way to get spent. In the case of corporations, much of it will be used for acquisitions. After the corporate cash building over the last years, many dollars will likely find a new home in 2011.
Moreover, with the economy certainly improving on numerous metrics, timing is now positive for the M&A market. Companies are more confident about the future–both their own and that of the macro economy. Those who have survived and emerged from the downturn are now poised to take advantage of opportunities. These opportunities are often in the form of strategic and value-adding deals.
“With the stock market rallying and CEO and Board confidence on the rise, I think the M&A business will be quite active in 2011,” says Steve Lipin, senior partner at the global corporate communications powerhouse, the Brunswick Group.
“We’re seeing a lot of interest from overseas acquirers closely studying their options in North America,” says Lipin, who specializes in all areas of global M&A, especially cross-border transactions. “But don’t count out the big U.S. companies using 2011 to expand their strategic and geographic footprints as well.”
There have been a growing number of deals this past year across a number of sectors. Technology, for one, has seen a huge number of acquisitions by companies of all sizes. The largest buyer has been Google, with a whopping 25 acquisitions in 2010 alone. A number have been small “talent purchases” but not all; the largest was the $700 million cash deal for travel software firm ITA Software.
Google was far from alone in the tech sector. Oracle, for example, made nine deals, including the $7.4 billion acquisition of Sun Microsystems and the $1 billion acquisition of Art Technology Group.
International Business Machines has done 15 transactions including $1.4 billion for Sterling Commerce (from AT&T) and the $1.7 billion acquisition of Netezza. Hewlett-Packard acquired six companies including 3PAR for $2.35 billion and Palm for $1.2 billion. This activity shows no signs of slowing; indeed, technology transactions should only accelerate as tech continues to be a key component of businesses and consumers’ purchasing decisions in this renewed economy.
There have been more than 70 tech/IT acquisitions–large and small–by the major industry leaders this year, compared to 33 last year and 55 in 2008. The tech sector is certainly recovering from the recession and not shying away from deals. Some deals, in fact, have become quite competitive when there’s a uniquely desirable product, competitor or technology in the industry.
Other sectors have been getting into the act and are also likely to be active in 2011.
A recent study by AdMedia Partners shows expected activity for the advertising industry and media companies from both strategic and financial buyers interested in content and services. In fact, 62% of financial buyers expressed interest in information and database publishing and online media, and 54% in social marketing and marketing technologies. With all the cash in hand, it makes more sense to buy a social media company–particularly one that shows traction and growth potential–at a premium. Companies don’t want to waste time and invest in the human resources that are needed to develop that type of entity internally.
Other sectors that were rocked severely during the recession, like real estate and finance, are now seeing survivors move to increase market share and divest non-core assets. Industry experts are predicting high level of activity within the publicly traded REIT sector. M&A amongst REITs will jump 88% and financial sector M&A will jump 75% in 2011 vs. 2010, according to Thomson Reuters survey projections.
With new government regulations on the books or being written in as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act, many of the big banks will be looking to unload certain riskier business units, like those tied to derivatives and hedge funds. Other companies will be eager to jump in and enter the lucrative areas of financing and banking. For example, in November, Fortress Investment Group acquired 80% of American General Finance with $20 billion of assets from American International Group. American General is a leading provider of consumer credit and specializes in products and services, including bill consolidation loans, home equity loans, personal loans, home improvement loans and loans to help consumers manage unexpected expenses. Earlier in the year, Fortress acquired CWCapital, a mortgage origination and special servicer company. This was the third servicer purchase by Fortress.
Health care is also certain to be in the corporate transaction news. Big pharmaceutical companies like Eli Lilly , Pfizer and Merck, along with biotech firms and those in the health care services sectors will all be on the prowl. Increasing demand from an aging population, health care legislation, and expiring patents creates the need to buy smaller biotech firms with new drug discoveries. All of this will drive more and more deal making in 2011.
Profiting from the M&A activity
What does this all mean for investors? What’s the best route for making money off of the impending deal flow? Well, Wall Street firms will certainly be a beneficiary of all this activity, as is typical during M&A booms. Firms with well established franchises and blue chip relationships will see their advisory businesses drive significant revenue. Leaders–whose stock prices don’t reflect their revenue growth potential–like Goldman Sachs, and boutiques like Evercore Partners, which has built a strong cross-border M&A franchises, stand to benefit the most. In addition, non-U.S.-based players like Barclays PLC should be a beneficiary of the advisory fees that will flow from the increasing globalization of M&A activity.
Outside of Wall Street, picking the winners becomes a bit trickier. The firms sitting on fat cash balances are more likely to be buyers in 2011. They’ll be looking for targets that are undervalued–though many firms’ stock prices have recovered in the general market upswing–or for those offering a key technology, product line or established customer base.
In many copycat type industries, a single big deal often shuffles the landscape for the remaining competitors. In the past, the health care/pharmaceutical sector has seen a number of follow-on deals after an initial shocking buyout or merger. By paying attention the sector trends, astute investors can move quickly into stocks that may be targets–hedging their bets while taking advantage, in many cases, of strong dividend yields offered by undervalued targets.
In addition to all the strategic buyers looking to accelerate growth and gain competitive advantage, the financial buyers of past years are also expected to move strongly. Corporations find themselves not only competing with industry players but increasingly fighting over attractive targets with well funded private equity firms. These so called financial buyers are also sitting on large cash balances themselves which they’re paid to invest. On the flip side, such firms have a backlog of portfolio companies from previous buyouts that they have been unable to sell during the last several years, and will now look to move those companies in better economic times.
As we enter the third year of a Democratic administration facing a now Republican-controlled House of Representatives and a less Democratic Senate, it remains to be seen what progress will be made from Washington. But be assured that outside the Beltway, from Wall Street to Silicon Valley, there’ll be plenty of dollars being spent in 2011.