Mergers drop 38% in 2001
Goldman Sachs top advisor; broken deals common theme in 2001.
NEW YORK (CNN/Money) - Aborted deals and the ugly term "recession" emerged as familiar themes this year as merger activity suffered a steep drop. But some investment banks like J.P. Morgan, which pushed its way to the top advisor spot for 2001's closing quarter, saw a silver lining.|
The economic downturn and disenchantment with technology stocks caused M&A transactions to plummet nearly 38 percent this year. And September's terrorist attack only made things worse.
"The origin of the merger drop was in the economic downturn and volatility that predated Sept. 11," said Steven Koch, a vice chairman of Credit Suisse First Boston and co-chairman of the firm's M&A group. "The economic disruption associated with Sept. 11 only solidified that trend."
The year saw only 6,793 announced mergers in the United States, down significantly from last year's 10,990 deals, according to preliminary data from Thomson Financial Securities Data.
Buyers and sellers were less likely to seek out partners because stock values declined, said analyst Joel Gomberg, of William Blair & Co.
"When economies do well, stocks do well so people have higher prices to use as currency," Gomberg said.
Although the market dropped, some analysts still are hesitant to say we've hit the bottom. "We're at a level that is as low as has been for a couple of years," Koch said. "We are leveling out and at a sustainable pace that will continue for the first half of next year." †
The year saw some major disappointments, most notably General Electric Co.'s failed $42 billion bid for Honeywell International Inc. The merger passed regulatory scrutiny in the United States but the European Commission blocked the merger on competition concerns. The transaction now signals that companies need to be more realistic in their expectations.
"It is vitally important for companies to examine and understand what the regulatory response is going to be and how to manage it," Koch said.
However, it is too early to tell whether the merger indicates that regulators across the Atlantic will be difficult, Koch said.
Hewlett-Packard (HWP: Research, Estimates) is now encountering problems with its attempted takeover of Compaq Computer Corp. (CPQ: Research, Estimates). †Last week, a key shareholder indicated it would vote against the merger while children of the founding families also are opposed.
As the deal's success becomes more doubtful, senior executives of both companies are attempting to sway institutional investors to their side. HP-Compaq's troubles teach the importance of ensuring that institutional investors, which hold large stakes, understand the strategy behind a transaction and management's motivation, Koch said.
"It is critically important to have healthy communication with your investor base, particularly when a transaction represents a meaningful shift for the company," he said. "Otherwise, deals aren't going to happen."
While activity dropped, there still were some notable transactions. In October, EchoStar Communications Corp. beat out News Corp. and inked a deal to buy Hughes Electronics Corp. The EchoStar-Hughes combination, valued at about $27 billion, places second this year in announced merger rankings.
In November, Conoco Inc. agreed to buy Phillips Petroleum Co. and the deal, including the assumption of debt, is now valued at around $25 billion, the third biggest of 2001.
American International Group's $23.4 billion purchase of American General Corp. came in as the top completed merger this year.
The year's largest proposal came from Comcast Corp.'s bid for AT&T's broadband unit. AT&T rejected the offer, now valued at $57.5 billion, and is in talks with several suitors vying for the business.
Merger advisors experienced a shake-up in the ranks as J.P. Morgan beat out Goldman Sachs for the top spot in the fourth quarter. J.P. Morgan served as advisor on 28 deals with a total value of $48.3 billion. Merrill Lynch came in second with 25 deals raising $45.7 billion while Morgan Stanley placed third with 28 deals valued at $43.7 billion.
Goldman Sachs (GS: Research, Estimates) , the leader in the first three quarters of this year, fell to fourth in the final 2001 quarter, with 19 transactions raising $43.4 billion. Last year's winner, CSFB fell to sixth with 29 deals totaling $38.3 billion, according to Thomson Financial
But Goldman came out the winner for the full year. Goldman advised on 152 transactions raising $352 billion while Merrill came in second with 101 deals valued at $252 billion.
IPOs come back
New issues scored somewhat of a rebound in the fourth quarter, led by the successful debut of Prudential Financial Inc. which. rose 7 percent on the New York Stock Exchange.
As in M&A, IPO activity dropped significantly this year with only 93 companies going public, raising $45.3 billion. Last year, 450 companies launched new issues, totaling $120.2 billion.
Goldman placed first in IPOs for the quarter and the year. The New York-based investment bank served as lead book runner on 7 deals in the fourth quarter, raising $8 billion and 14 for the year, totaling $12.3 billion. UBS Warburg placed second in the quarter with five IPOs, raising $1.1 billion, according to data from Dealogic, a New York-based investment banking research firm.
Kraft Foods Inc. maintained its title as the year's biggest IPO, weighing in at $8.7 billion. Prudential's $3 billion new issue took top honors for the fourth quarter.
A technology-related offering from Verisity Ltd. emerged as the top performing IPO of the year. Verisity (VRST: Research, Estimates), which offers chip design technology, gained nearly 20 percent in its March IPO. Since then the Mountain View, Calif.-based company is up 118 percent.