What the mega deals really mean

The Heinz and Dell transactions may not foreshadow an M&A frenzy, but they say a lot about corporate America and the economy.

By TheStreet Staff Feb 19, 2013 8:57PM

Pair of wedding rings copyright Fancy, AlamyBy Antoine Garathestreet logo

 

This just in: The year so far has brought with it the return of the mega deal, with $10 billion-plus transactions for the likes of Heinz (HNZ), Dell (DELL), American Airlines (AMRPQ), General Electric's (GE) stake in NBCUniversal and Virgin Media (VMED).

 

While the mergers, acquisitions and leveraged buyouts are of a size rarely seen since the credit bubble burst in 2007, it might be wise for investors to consider calls for a mega-merger frenzy as premature.

 

In fact, that's exactly what some top insiders in the M&A and private equity world are saying.

 

Mark Gallogly, head of private equity firm Centerbridge Partners, noted on Friday that such large acquisitions may be the exception rather than the rule, even if he expects that Wall Street is in the early stage of a post-crisis deal-making renaissance.

 

"These are really unusual transactions," Gallogly said of Dell's proposed $24.4 billion buyout and a $28 billion buyout acquisition of Heinz by Warren Buffett and private equity firm 3G Capital at Columbia Business School's Private Equity and Venture Capital Conference in Manhattan on Friday.

 

Gallogly notes that in Dell's case, the more than $5 billion in equity that company founder Michael Dell is contributing to the buyout certainly isn't the norm. Buffett's Heinz ketchup acquisition and a proposed blockbuster merger to pull American Airlines from bankruptcy also might not be symbolic of wider trends.

 

Still, the Centerbridge head and former senior managing director at the Blackstone Group said firms like his can expect an improving deals market ahead.

 

Even as some traders and analysts scour Wall Street for the next mega deal, investors ought to consider what Gallogly's comments might imply.

 

Notably, it could indicate further evidence of a consistent rise in valuations, improving executive and investor confidence, and a slow psychological turn to animal spirits from the crippling fear brought by the financial crisis.

 

In other words, status quo.

 

Consider that in the absence of frenzied periods of mega deals in 2012, overall M&A activity around the world ended the year roughly flat from 2011 levels, according to data provider Dealogic.

 

While M&A globally came in at about $2.7 trillion -- below 2008 levels in excess of $3 trillion -- the number of deals done exceeded levels from four years ago.

 

Even in the absence of blockbuster mergers like Heinz or Dell, private equity firms such as Carlyle Group (CG) and banks including Goldman Sachs (GS) have been hard at work in recent months.

 

Meanwhile, a surge in 2013 deal making may not be such an aberration from the previous year. Dealogic data show that nearly $1 trillion in transactions in the fourth quarter of 2012 was the highest quarterly total since the same period five years earlier.

 

Given the uncertainties in the past 12 months -- for instance, a partisan presidential election in the U.S., the so-called fiscal cliff, rising tax rates and economic woes in Europe -- the fact that the likes of Comcast (CMCSA) and Liberty Media (LBTYA) are putting money to work could signal the prospect of a post-crisis economic calamity is growing remote.

 

"There is a psychological effect that, in the very least, will create more deals," Brian Richards, a partner in the merger and acquisition practice at Paul Hastings, says of recent transactions. As a result of access to cheap financing and corporate balance sheets flush with cash, "there is an appetite in the marketplace for big deals."

 

Given Warren Buffett's commentary in the wake of Berkshire's $12 billion equity investment in the buyout of Heinz, the point is well taken.

 

On Thursday, the Oracle of Omaha said on CNBC he's still ready to use Berkshire's cash to bag an elephant of a deal.

 

Those trying to guess Buffett's next move (see TheStreet) might do well to consider food giants such as Hershey (HSY) or Campbell Soup (CPB), according to Brian Sozzi, chief equities analyst at NBG Productions (see TheStreet ).

 

Morningstar recently highlighted energy companies BG Group (BRGYY) and Chesapeake Energy (CHK), in addition to retail giant Kohl's (KSS), medical-products manufacturer Abiomed (ABMD) and Los Angeles-based lender City National (CYN) as some large takeover targets in 2013 (see TheStreet).

 

As TheStreet noted earlier in February, Morgan Stanley's (MS) proposed acquisition of a brokerage venture with Citigroup (C) could mirror the size and strategy of Comcast's deal for NBCUniversal and be yet another large 2013 merger.

 

For all the excitement over a flurry of February deals and the speculation of where the likes of Berkshire Hathaway will spend its money next, it might simply be wise for the ordinary investor to see a busy Wall Street as added confirmation of rising stock valuations, strengthening corporate earnings and a pickup in the economy.

 

 

 

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