The Penny King's Free and Clear M&A Fund

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Merger Activity Seen Cooling
Sunday March 28, 6:22 pm ET
By Sophy Tonder and Jessica Hall

LONDON/NEW YORK (Reuters) - Investment bankers are feasting on the biggest glut of mergers since the late 1990s, but recent market volatility and geopolitical upheaval have tempered the frenetic deal pace, and cast some doubt on the outlook for the rest of 2004.



Through Friday, global merger and acquisition volume jumped more than 90 percent in the first quarter to $514.6 billion, compared with $265.4 billion in last year's first quarter, according to preliminary figures from research firm Thomson Financial.

The spike in deal flow comes after a three-year slump in takeover activity, which stung investment banks that had come to rely on lucrative advisory fees during the merger craze of 1999 and 2000.

Bankers do not expect to see a return to the days of merger mania, as corporate chiefs are still cautious about embarking on expensive acquisitions. But the fast start to the year had left many dreaming of better days, and bonuses, ahead.

"There is a better tone in boardrooms around the world as to considering M&A now, but people are much more cautious than they were at the height of the M&A boom," said Anthony Alt, chairman of investment banking at Rothschild.

BIG DEAL

Bankers say the flurry of mega bids worth tens of billions of dollars each that have swollen M&A volumes so far this year will be hard to sustain due to faltering markets, uncertain political situations in several countries and the continued fear of terror attacks around the globe.

"I don't think we are going to continue with the kind of run rates that we've seen in the first few months," said Heino Teschmacher, European head of M&A at UBS.

Europe and the United States have produced four $40 billion-plus bids so far this year, including a 46-billion-euro ($56.03 billion) bid for French drug group Aventis (Paris:AVEP.PA - News) from its rival Sanofi Synthelabo (Paris:SASY.PA - News).

"There are more of those kind of deals in the pipeline, but at the end of the year, I can see market volume up by about 25 (percent) to 35 percent, instead of the 80 (percent) to 90 percent (increase) of the first quarter," said Teschmacher of UBS.

After a strong start to the year, the U.S. stock market stumbled in early March, erasing its 2004 gains. Shares cooled further after a wave of high-profile attacks spooked investors around the globe and weighed on financial markets.

A deadly March 11 bombing in Madrid was followed by an assassination attempt on the life of Taiwan's president and last week's assassination by Israel of Hamas leader Sheikh Ahmed Yassin.

Despite some gains in U.S. stocks on Friday, the markets' overall weakness and geopolitical unrest have made companies less interested in making bold and flashy merger announcements, investment bankers said.

Confidence could return, but for now the economic uncertainty has pushed some deals to the sidelines, they said.

WATCH AND WAIT

Companies also have become wallflowers instead of actively looking for partners as they watch several large, hostile takeover battles play out.

Comcast Corp.'s (NasdaqNM:CMCSA - News) $48 billion hostile bid for The Walt Disney Co. (NYSE:DIS - News), for example, would transform industries from cable TV to entertainment and broadcasting. So companies are waiting to see how their sectors would be changed before making their next move, bankers said.

Bankers say the return of the hostile bid, such as Sanofi's bid for Aventis, illustrates how the M&A market has turned.

Hostile bids are usually a feature of the top or the bottom of the market, bankers say, and they are encouraged that companies are now willing to pay up to get their hands on favorite targets.

Paolo Pereira, Morgan Stanley's head of European mergers and acquisitions, is confident 2004 will continue to produce a strong deal flow.

"We expect the current M&A market recovery to continue, driven by ... economic and capital markets recovery, as well as by sector-specific dynamics," Pereira said.

He expects financial institutions, health care, utilities and TMT (telecoms, media and technology) to be the most active sectors. (Additional reporting by Julie MacIntosh in New York)