April 3, 2007 > Market downturn
By Joe Bel Bruno
NEW YORK (AP), Mar 30 _ Blue chip stocks might have just suffered their worst quarter in two years, but that didn't stop Wall Street's army of investment bankers from putting together deals at a record pace.
High-profile transactions like the $31.8 billion (euro23.9 billion) takeover of energy company TXU Corp. and ongoing bids to buy the Chicago Board of Trade have helped U.S. acquisitions surge 21 percent from last year. That shows private equity firms and expansion-minded companies have not lost their taste for mergers and acquisitions despite stock market volatility.
In the first quarter of 2007, there were $428.69 billion (euro321.89 billion) worth of deals, according to research firm Dealogic. Globally, that number surged 15 percent to $1.13 trillion (euro0.85 trillion) _ and is on track to surpass last year's $4 trillion (euro3 trillion) record.
``The market is saying we may have a slowdown, but not a great recession or bear market,'' said Steven Bernard, director of M&A market analysis for investment bank Robert W. Baird & Co. ``And short-term volatility really isn't enough to derail M&A activity. In fact, those are the times companies pay less for their targets.''
The five biggest Wall Street investment banks have reported in recent weeks that their pipeline of deals has not diminished, even as global stock markets went south. The bull market was derailed on Feb. 27 when Asian exchanges suffered a one-day plunge that spread globally.
Even though Wall Street has recovered somewhat, the equity market realignment has left volatility in its wake. And that might be one of the reasons why acquisition activity has continued to heat up _ valuations of many companies have declined, making them more attractive buys for cash-rich corporate raiders.
Times of global risk present untapped potential for those looking to put deals together, said Goldman Sachs Group Inc. Chairman and Chief Executive Lloyd Blankfein.
``Risk proliferation has gone up, but so has our profit,'' Blankfein said during the investment bank's annual meeting on Tuesday. ``Risk is not so much targeted as it is a consequence of our strategy.''
He said that if the company wants to remain the world's top M&A adviser, ``one of the consequences of that is we will have to do more financing in addition to the advice we give.''
Indeed, investment banks like Goldman Sachs have made more out of less during the first quarter.
The number of deals has weakened year over year, with the amount falling to 1,397 from 2,012 in 2006. Meanwhile, the number of U.S. deals has slipped 11 percent from the fourth-quarter as companies were blindsided by the global stock drop.
But what has helped maintain the level of mergers and acquisitions in the U.S. is that the economy hasn't fallen in lockstep with the stock market. The economy, while showing signs of cooling, doesn't appear to be slowing precipitously.
In fact, this past week's economic data showed that gross domestic product is in better shape than expected. Government reports also showed consumer and business spending climbed, while unemployment remains low.
Investment banks have also been able to rely on a steady stream of deals coming from outside the U.S. The most impressive amount coming from Germany, which logged $127.49 billion (euro95.73 billion) worth of first-quarter deals _ up 188 percent from last year, according to Dealogic.
And there's no denying the impact private equity firms had on driving the pace of deals during the first quarter. Buyout shops like Kohlberg Kravis Roberts and Blackstone Group use private investments to buy companies and restructure them as private companies.
Unlike during the 1980s when financiers like Carl Icahn were leading deals, these days private equity firms are banding together to buy companies. The biggest deal of the first quarter was the acquisition of TXU, where the total value including debt was the highest amount for the biggest leveraged buyout in history at $41.8 billion (euro31.39 billion).
In the U.S., there have been 192 private equity deals worth $110.86 billion (euro83.24 billion), which represents 25 percent of all acquisition activity. Globally, there have been 575 private equity buyouts worth $171.05 billion (euro128.44 billion), up 15 percent year-over-year.
Bernard also points out that no matter how the big U.S. investment banks might do during a market turnaround, private equity doesn't face the same obstacles.
``Private equity still has as much money today as they had back in January,'' he said. ``A pullback might attract even more buyers.''