M&A Mania: Early 2011 Deals Have Already Hit a 10-Year High

More U.S. companies are merging, with the first 10 days of 2010 seeing more M&A activity since the beginning of any year since 2000.
More U.S. companies are merging, with the first 10 days of 2010 seeing more M&A activity since the beginning of any year since 2000.

A rash of New Year's corporate marriages has made the first 10 days of 2010 the most productive beginning for such deals in the last decade. According to financial data firm Dealogic, the total value of mergers in the year's first 10 days stands at $87.4 billion. That's the highest amount since 2000, which saw $160.2 billion in deals in the same period.

Leading the urge to merge was Duke Energy's (DUK) announced $13.7 billion stock-based acquisition of rival Progress Energy (PGN). At the same time, chemical maker E.I. du Pont de Nemours (DD) snapped up Danish food-ingredient maker Danisco (DNSOF) for $5.8 billion.

The spate of deals even includes Playboy founder Hugh Hefner's $207 million plan to acquire the shares of Playboy Enterprises (PLA) that he doesn't already own. He bought the shares using cash, with the help of private-equity firm Rizvi Traverse Management.

Why Companies Are Tying the Knot

The merger craze actually wasn't as sudden as it seems, says Tim Hartnett, U.S. private-equity leader for consultants PricewaterhouseCoopers. The deals had been in progress for most of the last half of 2010, he says. For one thing, companies are flush with cash: Altogether, S&P 500 companies have an estimated $1 trillion on their balance sheets.

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"It's been hard for corporates to grow their businesses without doing acquisitions," Hartnett says. "To increase your earnings organically by raising prices on your customers or cutting expenses has been tough in this environment. But in order to justify most companies' share prices they have to show growth, and the easiest way to show growth is to go out and buy something."

In addition, Hartnett says, private-equity firms have another $1 trillion to spend. These firms pool funds from their limited partners and can use the money to buy public companies, take them private, beef up their management and then sell the revamped firm in a new initial public offering.

Those deals have become more common because the debt markets -- more or less closed for 18 months during the financial crisis -- have grown more willing to fund such buyouts, Hartnett says. Private-equity deals are mainly financed with high-yield or junk bonds.

More Big Deals Are on the Way

While 2010 already has brought some big corporate deals, Harnett predicts we'll see at least one private-equity buyout in excess of $10 billion in the next six to nine months as financing continues to become more available.

With U.S. companies seeking growth outside of the country, you can also expect more domestic firms to buy growth opportunities abroad, such as with the DuPont deal. These companies aren't only looking for acquisitions in Europe but in emerging markets as well.

"The newest kid on the block is Brazil. We've been seeing a lot of deals there," Harnett says. "They have a large population and a growing economy." Companies are also snapping up firms in India and China, driving prices in those countries substantially higher in recent months.

Still, for some U.S. companies, it might not pay off to take part in the merger fad. While firms are rushing to make deals now while valuations are still considered reasonable based on the underlying assets, the run-up in the U.S. stock market -- and heated competition among the country's 1,600 private-equity firms -- already has made target companies much more expensive.

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