2010 Could Be an Explosive Year for M&A

Even though the New Year has only just begun, we've already seen some big merger and acquisitions action. Novartis (NVS) agreed to pay $28 billion for the rest of Alcon (ACL) it doesn't already own; Nestle says it will buy the U.S. frozen-pizza business from Kraft (KFT) for $3.7 billion; and Apple (AAPL) picked up a red-hot mobile startup, Quattro Wireless.Might all this be a harbinger of an explosive 2010? Perhaps so. Then again, M&A can be extremely fickle, especially if the economy goes into a double-dip recession or credit markets tighten up again.

But barring such unfortunate things, it does look like the urge to merge will increase this year: So let's see where we may see the action in M&A:

Tech will be on fire: It's hard to believe but the Netscape IPO happened about 15 years ago (August 9, 1995, to be exact). In other words, the Internet is starting to look like a mature industry, which often means there will be lots of consolidation.

The good news is that there is no shortage of willing suitors such as Apple, Google (GOOG), IBM (IBM), Dell (DELL), HP (HPQ), Microsoft (MSFT), Oracle (ORCL) and Amazon (AMZN). In fact, Google's CEO, Eric Schmidt, recently said he plans to do a deal every month.

Simply put, big tech companies need a way to stay ahead of the curve and rejuvenate corporate DNA with innovation. Why not do this by acquiring companies?

Perhaps the hottest part of tech deal making will be the mobile internet, in terms of advertising, apps and gaming. Consider a recent report from Morgan Stanley's (MS) Mary Meeker, who thinks that -- within the next five years -- there will be more people accessing than Internet from mobile devices than desktops. She says that the space is actually growing faster than all past tech cycles.

What deals may we seem? A recent article from DailyFinance predicts that Google will scoop up Twitter, which would be a way to ward off the growing power of Facebook. And what about Facebook? I think an IPO is inevitable in 2010, and Facebook could have company: perhaps the business networking site, LinkedIn.

Private Equity Will Make a Comeback: If you look at market cycles, private equity firms make huge sums after recessions. You can bet that top firms -- like the Blackstone Group (BX), TPG and Carlyle -- understand this extremely well and are working aggressively to put deals together. Already, we are seeing some signs, such as the $4 buyout of IMS Health by TPG.

Private equity funds are sitting on $400 billion in available cash. But do not expect mega deals. Instead, look for transactions in the $1 billion to $5 billion range, with perhaps some reaching $10 billion. There will also likely be more details in emerging markets like China, Brazil and India. But these deals will probably be in the form of minority investments (because of restrictions on foreign investments).

This will not be a theme just for private equity deals, though. Many large companies will be looking at global markets for M&A opportunities. According to Ernst & Young LLP's Transaction Advisory Services survey, about half the respondents indicated they are looking at such deals so as to pump-up the top-line. The report estimates growth in emerging economies at 5% in 2010, which compares to 1.25% in advanced economies.

Oh, and some of the largest companies in the country - those that make up the Fortune 1000, are sitting on a pile of cash: $1.8 trillion altogether. It's the most in the past 40 years.

Expect a Gusher in Energy Deals: The global energy market is already revving its deal machine. The super majors have solid balance sheets and access to cheap capital.

A model deal has come from Exxon Mobil's (XOM) $41 billion purchase of XTO Energy (XTO). Unlike a typical oil deal, this is not about cutting costs and streamlining operations. Instead, it is to make the inevitable transition from traditional oil to unconventional sources, such as natural gas.

Until now, much of this was the focus of smaller companies that were willing to take big gambles as well as create new technologies to extract energy in tough environments (such as shale oil).

The problem: These companies don't have the huge amounts of capital to fully exploit the opportunity. In other words, this is a perfect M&A opportunity for the super-majors. And, as I pointed out in a recent DailyFinancecolumn, there are some choice companies that look ripe for buyouts: Chesapeake Energy (CHK), EOG Resources (EOG), Anadarko Petroleum (APC), Petrohawk Energy (HK), EnCana (ECA), Devon Energy (DVN) and Ultra Petroleum (UPL).

Tom Taulli advises on
business tax preparation and resolving tax problems. He is also the author of a variety of books, including the including The Complete M&A Handbook. His website is at Taulli.com.
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