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U.S. M&A drops 57%
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July 6, 2001: 6:13 a.m. ET
Goldman top adviser in first half; Global mergers/acquisitions off 53%
By Staff Writer Luisa Beltran
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NEW YORK (CNNfn) - First half mergers and acquisition results are finally in and reveal the obvious – Wall Street is in a slump and the top deal makers are taking a major hit.
In the first half of 2001, worldwide M&A volume tumbled 53 percent with nearly 15,000 announced deals raising just $906.1 billion, the lowest level since 1997. This compares with last year's fast and furious pace in which 20,000 transactions raised $1.94 trillion.
In the United States, the facts are just as dismal. Announced mergers and acquisitions in 2001 raised just $380.1 billion, down 57 percent from the $886 billion recorded at the midway point last year, according to data from Thomson Financial Securities Data.
The slowing economy coupled with slumping share prices have caused many potential acquirers to sit out the market decline, said Richard Peterson, market strategist at Thomson Financial.
Many buyers, still in the thrall of last year's high M&A prices, are unwilling to accept less than what they would have accepted a year ago, analyst Diana Yates, of A.G. Edwards & Sons Inc. said.
"A lot of the time it's the ego of the selling party," she said. "But what's really dragging down M&A is the market price."
Top advisors
But don't shed a tear for Wall Street's investment bankers. As reported by CNNfn.com late last month, Goldman Sachs edged out the competition for the top stop, serving as adviser on 166 announced global transactions, valued at $253.9 billion. Last year, Goldman ranked second.
Merrill Lynch & Co., which placed fourth in mid-2000, came in second with 119 deals raising $200.1 billion. Last year's winner, Morgan Stanley, dropped to third with 135 deals raising $198.2 billion. J.P. Morgan Chase, not included in top five last year, ranked fifth with 189 transactions valued at $152.6 billion.
Goldman also placed first in U.S. M&A, serving as adviser on 79 announced transactions valued at $138.4 billion. Morgan Stanley, which placed second last year, also came in as runner-up this year. The venerable Wall Street bank advised on 64 deals valued at $117.7 billion. Credit Suisse First Boston, which also advised on the most deals this year, edged up to third with 115 transactions raising $105.2 billion.
Rounding out the pack, Merrill fell to fourth this year with 49 deals raising $77.2 billion, while J.P. Morgan (JPM: down $1.14 to $44.39, Research, Estimates) ranked fifth with 76 transactions valued at $58.8 billion.
The bankers
The slowing M&A pace hit investment banks hard in the second quarter. Merrill Lynch warned last week that current market conditions will cut into second-quarter revenue and profit. Merrill (MER: down $3.09 to $55.71, Research, Estimates) said it experienced a downturn in investment banking but still managed to keep a leading position in M&A.
In late June, Morgan Stanley (MWD: down $2.42 to $60.88, Research, Estimates) reported a sharply lower profit but still beat expectations. But Morgan revealed that advisory revenue plummeted 55 percent in the quarter compared with a year earlier as a result of sharply lower merger and acquisition activity. Rival Goldman Sachs (GS: down $1.45 to $82.55, Research, Estimates) also met expectations but said that revenue from investment banking, its key revenue producer a year ago, fell more than half to $784 million from $1.59 billion a year earlier.
"M&A is not going to be enough to carry the day for investment bankers as far as earnings go," Yates said.
Top deals
So far, financial services have supplied the year's biggest deals. Insurers took the top spot with American International Group Inc.'s $23 billion takeover bid for American General Corp. earning the title as biggest U.S. based transaction, Thomson Financial said.
But the generally staid banking sector served up the most exciting drama this year with the shoot-out for Wachovia Corp.
Atlanta-based SunTrust Banks Inc. (STI: down $1.52 to $63.61, Research, Estimates) and Charlotte, N.C.-based First Union have been engaged in a two-month bitter battle to acquire Wachovia. SunTrust made a hostile $14.7 billion bid in late May, which Wachovia (WB: down $0.95 to $70.24, Research, Estimates) rejected, choosing instead to stay with First Union.
The banks are still fighting it out, with Wachovia shareholders set to vote Aug. 3 on the First Union (FTU: down $0.63 to $33.80, Research, Estimates) bid.
The Wachovia saga is notable in that the bank chose First Union over SunTrust because it apparently was a better fit, analysts said. SunTrust and Wachovia were engaged in merger discussions that began last November, but talks fell apart in December over differences in each firm's wealth management businesses.
"This is a wake-up call that boards no longer do deals for the people at the top but for what is best for the shareholders," Yates said.
The financial services sector was notably active in the first half. AIG's (AIG: down $0.80 to $84.52, Research, Estimates) $23 billion takeover of American General Corp. followed German insurer Allianz AG's (AZ: down $0.39 to $28.32, Research, Estimates) agreement to buy Dresdner Bank for $21 billion in April, creating one of the world's leading financial powerhouses.
Citigroup, North America's biggest financial services company, agreed to acquire Banamex-Accival, the No. 2 Mexican bank known as Banacci, in May for $12.5 billion in cash and stock.
Cross-border deals, those involving firms from disparate nations, dropped nearly 50 percent this year to $340 billion compared with the near $627 billion accumulated in 2000. But cross-border deals did account for three of the top five deals in the first half 2001. In addition to Allianz's $21 billion offer for Dresdner, German utility E.ON made an April bid for its British counterpart Powergen, valuing the British company at 15 billion euros ($14 billion).
Halifax, the Britain's biggest mortgage lender, agreed to merge in May with the Bank of Scotland to create the country's No. 5 bank. The Halifax takeover of BoS was valued at £10.3 billion ($14.4 billion).
Financial services, and banks in particular, have outperformed the broad market over the last year, said analyst Dave Berry, of Keefe Bruyette & Wood.
Early last year, banks were out of favor and then rebounded when the biotech and technology sectors crashed in first quarter 2000. "Fads end eventually and value suddenly mattered again," Berry said. "The bank group outperformed the broad market in third, fourth and first quarter of this year."
"Financial services came back in vogue because of the technology crash," said analyst Colin Devine, of Salomon Smith Barney. "But there are not that many companies [left] to buy."
Likely buyers
Further consolidation is expected in the financial services and likely acquirers include Citigroup (C: down $1.52 to $50.76, Research, Estimates), J.P. Morgan Chase, and Morgan Stanley (MWD: down $2.42 to $60.88, Research, Estimates).
"The strong are getting stronger," said A.G. Edwards' Yates. "There are more opportunities to buy at a cheaper price."
It is unclear whether General Electric Co., which failed in its $43 billion takeover of Honeywell International Inc., would be on the acquisition hunt. The company is always looking at potential transactions and GE or its financial arm, GE Capital, has averaged 100 acquisitions each year for the past four years, a spokeswoman said.
Asked whether GE (GE: down $1.76 to $46.71, Research, Estimates) would appeal the European Commission's rejection of its Honeywell (HON: down $1.30 to $35.20, Research, Estimates) purchase, the spokeswoman said only: "We are reviewing our options."
But insurers are expected to figure prominently during the second half. The sector is currently in the last stages of consolidation, said Devine of Salomon.
German insurer Allianz is seen to be on the prowl along with Amsterdam, Netherlands-based ING Group, which in early June bought a majority stake in Seguros Comercial America, the largest insurance company in Mexico. Aegon NV (AEG: down $0.87 to $27.28, Research, Estimates) and AXA (AXA: down $0.80 to $27.70, Research, Estimates), Europe's biggest insurer, are expected to make acquisitions.
British insurer Prudential PLC also will be looking for a company since it lost out in its bid to buy American General, analysts said.
Likely acquisition targets in 2001 include: Greensboro, N.C.-based Jefferson Pilot (JP: down $0.64 to $47.98, Research, Estimates), a life insurer; Boston-based John Hancock Financial Services Inc. (JHF: down $0.70 to $40.26, Research, Estimates), which went public in 2000; Philadelphia-based Lincoln National Corp. (LNC: down $0.88 to $50.25, Research, Estimates), which offers a top-ranked annuity business; and, Hartford Financial Services Group (HIG: down $1.32 to $66.88, Research, Estimates), a diversified insurer. 
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