Investors warm up to big deals

The big takeover deal has come back, reflecting increased corporate confidence and economic recovery. What should hearten prospective deal makers is how the stock market has reacted to the transactions: It has loved them.

Across the globe, deal volume stands at $338 billion so far this year, a rate 25% higher than in the same period last year. And in the U.S., deal volume is more than double last year's rate, which makes 2011 the most active since 2008.

The deals are getting bigger, too. In 2011, there have been 12 deals valued above $5 billion, eight of them in the U.S., according to Dealogic. There were only two such deals in the U.S. at the same time last year.

For all their size, the deals have had little sizzle, serving to consolidate mostly coal-mining, utilities and exchange companies. There was Alpha Natural Resources Inc.'s $7.1 billion deal to buy Massey Energy Co., a $13.7 billion merger of utility companies Duke Energy Corp. and Progress Energy Inc., and this week, the planned deal between London Stock Exchange Group PLC and Canada's TMX Group Inc., the company that owns the Toronto and Montreal exchanges.

One of the big differences from past merger run-ups: Investors are sending the acquirers' stock prices up, not down, after the deals are made public.

Shareholder Approval
Stock owners of acquiring companies are showing support for big transactions.

Shares of iron-ore producer Cliffs Natural Resources Inc. rose nearly 3% on Jan. 11 after it announced a deal for rival iron-ore producer Consolidated Thompson Iron Mines Ltd. for about $5 billion.

On Monday, Danaher Corp. agreed to pay $5.87 billion for Beckman Coulter Inc., which makes diagnostic equipment used in medical testing. Danaher is paying a 45% premium on Beckman shares, usually a sum that sparks acquiring-company shareholders to fear the company is spending too much. But Danaher stock rose on the news, as investors cheered the industrial conglomerate's move into a new, high-growth sector of life sciences. Swelling middle-class populations in emerging markets such as China and India are expected to drive demand for preventive medical care, of which clinical testing is a central feature.

Deutsche Bank analyst Nigel Coe called the deal "strategically coherent" and said the low cost of financing the deal, given the state of credit markets right now, will add more to Danaher's earnings.

Wall Street has welcomed these deals because many of these industries were ripe for consolidation before the recession, but deal-making was put on hold as the debt markets shut down and companies preferred to hold on to their cash.

For instance, Deutsche Börse AG and NYSE Euronext talked seriously about a deal in 2008 and 2009, but the fragile global economy discouraged a cross-border merger. The two are now close to a tie-up to form a company with a putative market value of $25 billion, and a deal could be sealed next week. The Big Board's stock shot up as much as 18% on news of the latest talks, which followed Tuesday's merger news between the owners of the London and Toronto exchanges. Shares of those companies climbed 9% and 4%, respectively.

"We saw a time period in 2009 and even in early 2010 when CEOs were primarily focused on tactical opportunities, but today they're focused more on strategic opportunities," said Jack MacDonald, co-head of Americas M&A at Bank of America Merrill Lynch.

Danaher, for instance, has had its eye on diagnostics companies for years. It was a confluence of factors, including the improving economy, with "headwinds dissipating, tailwinds getting stronger," that helped it seal a deal for Beckman, Danaher Chief Executive Lawrence Culp said in an interview Monday.

Low interest rates, strong corporate performance in 2010 and a sense that the global economy is moving forward have put companies "back in the M&A game," he added.

Still, some deal makers noted that there is reason to be cautious, given the worries about the finances of some European governments as well as unexpected crises like the protests in the Middle East.

"Transformational deals are back," said Mark Shafir, head of global M&A at Citigroup. "Companies are willing to take more risks. But with six weeks behind us, it's early to declare victory."

In 2010, there were 65 deals around the world valued at more than $5 billion, compared to 132 such transactions in 2007, considered the heyday of the last merger wave.

Last month, agribusiness giant Cargill Inc. said it plans to give up its majority stake in fertilizer company Mosaic Co. in a transaction valued at about $24.3 billion. The move could make Mosaic, a leading seller of potash and phosphate, a more attractive takeover target.

Although private-equity firms have been largely absent from headline-grabbing transactions, they have competed for multibillion-dollar deals. Many observers expect that with attractive financing terms and the need to put capital to work, there will be several leveraged buyouts that hit $10 billion or more this year. Private-equity firms weren't able to hit that benchmark last year, although financing terms improved.

A group that included Apollo Management, Bain Capital and TPG Capital proposed acquiring Sara Lee Corp. for almost $19 per share. But the Downers Grove, Ill.-based company, which had sought at least $20 per share, rejected the offer as too low. Brazilian meats processor JBS SA was also interested in Sara Lee but faced difficulties raising financing to increase its bid.

"You're going to see a robust, pretty good quarter and first half, as long as the macroeconomic and geopolitical environment doesn't flare up," said Boon Sim, global head of M&A at Credit Suisse. Mr. Sim said he expects overall M&A activity this year to be up 30% over 2010.