M & A looks hot--and energy hotter still: a number of factors coming together have M & A experts talking about a banner year, especially for the energy industry, where volatile commodity prices have spurred buyers and sellers to pair off.

• Author: Sweeney, Paul
• Position: Acquisitions and mergers

This is a hot time for mergers and acquisitions. And among industries to watch for M & A activity in 2006, few are expected to be more sizzling than the oil-and-gas sector, which is riding the spikes in prices coming from events like Hurricanes Katrina and Rita and the Mideast political tensions.

Boasting two of the biggest takeover plays of the year in 2005--ConocoPhillips' $35.6 billion purchase of Burlington Resources and Chevron Texaco's buyout of Unocal for $18.9 billion--the petroleum business helped pace a global M & A climate that, according to Dealogic, hit $2.9 trillion in deal volume last year. That's the highest total since the record year of 2000, and a 38 percent increase over 2004.

As oil prices hover above $65 a barrel and natural gas fetches $8 to $10 per million cubic feet (mcf), many involved in the oil industry expect this year's M & A dollar values to overtake last year's. "We're in the third year of the biggest bull run in commodity prices we've ever seen," says Rick Roberge, the Houston-based head of energy transaction services at PriceWaterhouseCoopers. "I expect 2006 to be the best year ever," he adds, "and even if prices come down, it could spur more deals as sellers get desperate."

Adds Patrick Keeley, senior managing director and group head of energy and natural resources at Friedman Billings Ramsey in Arlington, Va.: "It's a seller's market--and the only question is who will pay the most."

It's not just oil and gas, of course. Many of the factors that are driving corporate combinations and deal-making in the energy sector are at work across a range of industries, including utilities, retail, aerospace & defense, health care and financial services. For such sectors, this year should not only equal last year's excitement, say industry experts, analysts and financiers, but it could overtake the all-time-best year of 2000, when $3.5 trillion in M & A volume was recorded.

"There's a greater degree of confidence in the international economy, and growth prospects are good," says Doug Petno, a managing director and head of energy investment banking at JP Morgan Chase. "That gives boards of directors confidence that acquiring new assets will mean growth, new products and new regional exposure. So while every deal has its own rationale and every transaction has a different motive," he adds, "we're witnessing a global phenomenon, one that is happening across many sectors."

Not every sector will prove an M & A barn-burner this year. Much of the airline industry is floundering, as a recent Standard & Poor's report asserts. Packaging companies are "hunkering down" in the face of steep commodity prices. And, following SBC Communications' $21.2 billion acquisition of AT & T Corp., the telecommunications industry is expected to be relatively dormant.

[ILLUSTRATION OMITTED]

But in the broader context, the stars are aligned...