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Strategies & Market Trends : Speculating in Takeover Targets
CTG 7.200+1.8%Jun 2 4:00 PM EDT

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From: richardred3/9/2014 6:03:12 PM
   of 6657
Company takeovers flood might be building

Matt Rourke | Associated Press Comcast has offered to buy Time Warner Cable for $45 billion, a deal that would boost its customer count to about 30 million.
NEW YORK — So far, 2014 is looking like the year of the big deal.

Flush with cash and high stock prices, companies are buying up the competition at levels not seen since the dot-com bubble. And with Washington providing more clarity on government-spending plans, CEOs are more confident that their expansion hopes will pan out — especially if the economy keeps growing.

In the past month, Comcast has offered to buy Time Warner Cable for $45 billion. Pharmaceutical giant Actavis is buying Forest Laboratories for $25 billion. And Facebook shocked the technology world by offering $19 billion for tiny WhatsApp.

Merger-and-acquisition executives say they have expected a pickup in deal activity for a couple of years, given the bull market in stocks and the economic recovery. But what prevented the really big transactions was uncertainty about the federal budget, the debt ceiling and the fate of President Barack Obama’s Affordable Care Act.

With those issues resolved — at least for now — the way has opened up for bigger, more-complex deals.

“The deals we have seen in the last couple of weeks are that tipping point that we’ve been waiting for,” said Mark Walsh, who heads the mergers-and-acquisitions practice at Deloitte, one of the world’s largest accounting and consulting firms. “There’s so much pent-up demand to do a deal now.”

U.S. companies announced $336.13 billion in deals in January and February, according to Dealogic, which helps banks and brokers. That’s up 31 percent from $256.21 billion during the same period last year. It’s the largest amount spent during the first two months of a year since 2000.

Companies announced 1,550 deals in the first two months of 2014, Dealogic said. Although that is fewer than in either 2012 or 2013, the average transaction size is more than double what it was a year ago.

The high prices reflect companies’ going on the offensive to boost earnings. The economy, while growing, still isn’t booming. Since the end of the recession, companies have had to act defensively — protecting profits by cutting costs through layoffs or benefit reductions, or by moving manufacturing elsewhere.

In an effort to lift earnings and please shareholders, S&P 500 companies also have announced plans for nearly $1 trillion in buybacks over the next several years, and more than four-fifths of them now pay a dividend, the highest proportion since 1998.

With their tool box nearly depleted, corporations “are looking for that extra bump” in sales now, Walsh said. A lot of Deloitte’s M&A business has been with companies “looking to expand their product lines or expand geographies.”

Buying Time Warner Cable would boost Comcast’s customer count to about 30 million, including the New York City market. For Facebook, WhatsApp is an opportunity to buy a fast-growing message service that is popular in emerging markets and Europe. Facebook CEO Mark Zuckerberg has said he expects WhatsApp, which has 400 million users, to grow to

1 billion users in the near future. Ireland-based Actavis gains both a broader variety of drugs to sell and a larger sales presence in the U.S. with its acquisition of Forest Labs.

Another example is the Japanese liquor company Suntory Holdings, which in January said it would buy Beam Inc., the maker of Jim Beam and Maker’s Mark, for $14 billion. The deals will “allow us to achieve further global growth,” said Nobutada Saji, president and chairman of Suntory.

Getting into the whiskey business is next to impossible, said Thomas Mullarkey, a stock analyst for Morningstar. The popular liquor needs to be aged in barrels for years. Although Suntory has a good niche market selling Japanese whiskey in Japan, it could never replicate or grow that business in the U.S. “It’s faster and cheaper for Suntory to buy Beam,” Mullarkey said.

Corporate finances also are strong. Companies have been hoarding cash on their balance sheets since the financial crisis, stashing away about $1.6 trillion, according to the Federal Reserve, and investors are increasingly demanding that companies decide what to do with it. Although investors like companies to keep cash on their balance sheets, having too much is like stuffing money into a mattress — it doesn’t do anything. Investors want to see money put to work, earning a return.

Companies also are able to make deals because financing is cheap. Interest rates remain low. The yield on the 10-year U.S. Treasury note, which is a benchmark for many types of loans, such as mortgages and corporate debt, is 2.78 percent. Also, investors are eager to buy corporate bonds, which makes financing a deal historically cheap.

Companies can use their stock, much of it trading at or near all-time highs, as currency.

Facebook is using mostly stock to buy WhatsApp. Comcast’s proposed merger with Time Warner Cable is an all-stock deal, and Actavis is using a combination of stock and cash to buy Forest Labs.

The high prices reflect the strength of corporate balance sheets and the confidence of CEOs, encouraging more deals.

“A healthy M&A market ultimately represents a flourishing economy,” said Martyn Curragh, head of U.S. deals for PricewaterhouseCoopers. “Seeing a big deal come together successfully helps bring confidence to other companies who are possibly looking at doing a deal,” he said.

“I don’t think we’ve seen the floodgates open yet,” Deloitte’s Walsh said, “but looking six,

12 months down the road, we’re definitely looking at a big increase.”
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