Deal or no deal: the M&A landscape in the U.S. has restarted after years of laying fallow, but this is not your typical rebound.

Author:Sweeney, Paul
Position:Deals & Dealmakers
 
FREE EXCERPT

Is it "dealtime" in America? By some measures, the answer is yes. There's been a dramatic uptick in domestic U.S. mergers and acquisitions (M&A) through the first four months of 2013. According to data firm Dealogic, M&A deals--including leveraged buyouts and transactions by private equity firms--have totaled $402 billion through the first four months in 2013, up 66 percent from the $242 billion consummated during the same period last year.

Since October 2012, moreover, the marketplace has seen a flurry of "mega-deals" of $10 billion or larger. And conditions seem ripe for a continued M&A resurgence. According to the U.S. Federal Reserve, American companies are sitting on a cash hoard of $1.7 trillion.

To keep corporate profits growing and shareholders happy those liquid assets ought to be put to work. Investing in growth-by-acquisition--either to strengthen core competencies, gain entrance to new products and markets or to diversify rapidly into whole new sectors--are among the most venerable uses of corporate cash.

Freeport McMoran Copper & Gold Inc., a global mining giant, is a case in point. The Phoenix-based metals-and-mining concern's $11.4 billion takeover of Plains Exploration Co. in December of 2012 signaled its intention to combine Freeport-McMoran's mineral assets with Plains' proven oil-production assets to become a natural resources powerhouse. In a cash-and-stock transaction, Freeport McMoran offered up $6.9 billion in cash and debt.

External financing is readily available as well. Big banks--many of which nearly capsized as the U.S. and global economies barely weathered the financial crisis of 2008 and 2009--are on the soundest footing yet since the Great Recession and have signaled a willingness to make affordable loans for M&A and leveraged buyouts.

As a recent Morningstar analysts' report, composed by M&A analysts Bridget Freas, R.J. Hottovy and David Sekera asserts, banks are not only demonstrating "an increased appetite for funding leveraged buyouts" but the corporate bond market "is open and active, making it easier to finance large-scale acquisitions, particularly as companies continue to stockpile cash."

David Magdol, chief investment officer at Main Street Capital, a Houston-based investment firm that provides debt and equity capital for middle-market private equity deals, reports that lenders are also returning to "covenant-lite" financing arrangements, meaning that they're less likely to pull the plug on loans than during the financial crisis.

Stock prices are blowing the roof off the New York Stock Exchange, among other U.S. bourses. In May, both the Dow Jones Industrial Average and the S&P 500 stock indices hit new highs, the latter of which shows robust returns of more than 15 percent in 2012, providing corporate America with even more ammunition to use in stock-swap M&A deals. At the same time, the U.S. economy continues to show improvements gross domestic product grew by 2.5...

To continue reading

FREE SIGN UP