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Takeover deals pick up as execs get bolder

September 21, 2009 |  6:07 pm

The stabilizing economy and rising stock market are spurring a budding recovery in the previously lifeless corporate merger market.

In another sign that executives are feeling confident enough to greenlight big deals, Dell Inc. on Monday said it agreed to buy technology services firm Perot Systems Corp. for $3.9 billion in cash.

That follows Walt Disney Co.’s $4-billion deal for Marvel Entertainment Inc. last month and Kraft Foods Inc.’s $16-billion hostile bid for rival Cadbury PLC two weeks ago.

The uptick in takeover activity is a welcome sight on Wall Street, where investment bankers have pined for the juicy fees derived from putting companies together.

Fish

"You had a lot of people in Manhattan who were not all that busy over the last six months or so," said Andy Levine, a partner in the mergers and acquisitions practice at Jones Day in New York. "There’s a lot of relief that it’s coming back."

And for the stock market overall, a boost in takeover activity provides another pillar of support for share prices. Perot Systems jumped $11.65, or 65%, to $29.56 Monday, and the tech-heavy Nasdaq composite edged up 0.2% to 2,138.04, nearly a one-year high, on an otherwise weak day for the market.

Still, we’re a long way from the furious dealmaking of a few years ago. August was the slowest month for merger announcements in five years, according to researcher Dealogic.

Year to date, U.S. companies have announced deals worth $494 billion, down from $913 billion at this point last year, according to Dealogic. The total stood at $1.3 trillion at this point in 2007, when abundant credit lubricated deal flow.

Several factors are driving the merger boomlet. The improving global economy is generating more confidence in corporate boardrooms. The soaring stock market has convinced some executives that potential quarry won’t get any cheaper. And companies that had been hoarding cash for safety’s sake now are looking for ways to boost earnings in what’s expected to be a slow-growth environment.

While financing is available for sensible deals, however, there has been no return to the use of excessive leverage or exotic financing techniques, experts say.

One potential obstacle to a new merger wave: reluctance on the part of would-be sellers, some analysts say.

Many attractive targets figure they should be able to fetch far higher prices in a year or two if the economic rebound continues, and are hesitant to sell when their stocks still are far below their all-time highs.

"You’re seeing many deals not happen because of that," said Ravi Chanmugam, head of the North American M&A practice at Accenture, the consulting firm.

Target companies’ desire to hold out could spur a "sharp resurgence" in hostile offers, in which buyers try to do an end-run around management and take their case directly to shareholders, analysts at Citigroup concluded in a recent report.

In any case, deals are likely to beget more deals as acquiring companies watch rivals pull off transactions.

"Many firms have just not seen a lot of their peers pull the trigger on deals, so if you pull the trigger you’re somewhat unique in today’s market," said Scott Kolbrenner, an investment banker at Houlihan Lokey in Century City.

-- Walter Hamilton

Image credit: Zazzle.com

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