M&A activity: Verizon deal provides fuel.

• Author: Barlas, Stephen
• Position: Good Kindling Fires-Up - Verizon Communications Inc

When Verizon Communications Inc. Chairman and CEO Lowell McAdams spoke with analysts via a conference call on Sept. 3, 2013, he said his company was acquiring Vodafone Group plc's 45 percent interest in Verizon Wireless "after a decade of anticipating."

It was paying Vodafone $130 billion, consisting primarily of cash and stock, with about $49 billion of that total coming from the sale of bonds, marking it the largest corporate sale ever. Sitting in a studio at Verizon's operations center in Basking Ridge, N.J., McAdams explained, in general terms, why the anticipation could now end: "The timing of this transaction is right from both the strategic and financial perspective."

The timing appears to be right for many companies. "Many corporations have trimmed all the fat they can from their businesses and are now realizing their cost of capital is likely to rise. That's one of the reasons we have been witnessing more M&A activity," says Kathleen Gaffney, vice president and co-director investment grade fixed in come, Eaton Vance Investment Managers. "If companies are going to finance a deal, there may be no better time than the present with rates still close to record lows."

Microsoft Corp. announced its $7.2 billion purchase of Nokia Corp.'s mobile phone business at about the same time Verizon scooped up Vodafone's share in Verizon's wireless business. The Verizon and Microsoft deals overshadowed Koch Industries Inc.'s $7.2 billion purchase of Molex Inc. one week later.

Though the Koch acquisition was the same size as Microsoft's, mention of its significance disappeared in the press the day after it was announced. As if acquisitions in the billions had suddenly become de rigueur. Deals continued to roll off the assembly line throughout the fall. On Sept. 18, Packaging Corporation of America acquired Boise Inc. for $1.995 billion.

Recent acquisitions have been both sizeable and smaller in dollars but still stunning. Amazon.com Inc.'s CEO Jeff Bezos's $250 million purchase of the The Washington Post Co. in August is a prominent member of the latter category, although Bezos is making the purchase with his personal fortune, and for cash, so interest rates aren't an issue there. US Airways Group's merger with bankrupt American Airlines (AMR Group), announced last December, was perhaps less of a surprise, but no less significant, as two of the top five U.S. airlines could dissolve into one.

Conditions Driving M&A

The soil has been fertile for these kinds of deals for the past year, according to Greg Lemkau, co-head, global mergers and acquisitions, investment banking division, Goldman Sachs Group. Speaking in a webcast in July, Lemkau said, "Conditions driving M&A are as good as they have been in a long time." He was referring to historically low interest rates, record corporate cash balances and relatively low corporate organic growth opportunities.

Given...