News Column

Price Trumps Ego in Wall Street's Urge to Merge

August 7, 2014

John Waggoner, @johnwaggoner, USA TODAY

Merger-and-acquisition activity on Wall Street is heating up (file image)
Merger-and-acquisition activity on Wall Street is heating up (file image)

Merger-and-acquisition activity on Wall Street is red hot -- but it may not be at fever pitch yet.

Global M&A activity has hit $2.2 trillion this year, the best year-to-date showing since 2007, according to Thomson Reuters. That's up from $1.29 trillion the same time last year.

Signs of frothiness are starting to appear, says Matt Toole, director of deals intelligence at Thomson Reuters. "We're seeing competing bids, unsolicited bids and hostile bids," Toole says. "Those show signs of confidence."

But some big bids appear to be stalled by price, something you typically don't see in a frothy market. Tuesday, two big deals collapsed: Fox pulled its bid for Time Warner, and Sprint stopped its quest for T-Mobile.

In both cases, price trumped ego. In the case of the Fox-Time Warner deal, even a sweetened offer of $89 billion, or $90 to $95 a share, wasn't enough to tempt Time Warner management.

In the case of Sprint, T-Mobile wasn't enthusiastic about the offer or being Sprint's merger of last resort. Sprint had said it would be unable to compete by itself in an industry increasingly dominated by giants. T-Mobile is being courted by Iliad, a purveyor of ultra-cheap mobile plans in France, as well as Dish Network.

"The peak of a merger wave tends to be signaled by completion of blockbuster deals and the failure to finance blockbuster deals," says Robert Bruner, dean of the Darden Graduate Business School at the University of Virginia. "These two stories are not the result of a failure to finance."

All of which isn't to say that merger fever has cooled off. Walgreens has completed its acquisition of Alliance Boots, a Swiss-based drugstore company, even though fierce public backlash has quashed its plans to claim itself as a Swiss company to reduce its tax bill.

So-called inversion deals, in which U.S. companies buy overseas firms to escape U.S. taxes, may be cooling off, says Toole. "If you're structuring a deal around another country and Congress and Treasury might be coming after you, you might see some sobriety there."

The collapse of the two deals may reassure investors that merger mania has not yet hit the levels of 2000, when huge -- and ultimately, disastrous -- mergers were constantly in the headlines. The poster child was the AOL-Time Warner merger, when AOL bought Time Warner for $164 billion. Time Warner ultimately spun off AOL in 2009.

Vast amounts of cash on corporate balance sheets have pushed companies to purchase new businesses, often a cheaper alternative than building from scratch -- particularly, when interest rates are low. The bellwether 10-year Treasury note closed Wednesday at 2.47%. "Given the liquidity on corporate balance sheets and the capital markets, I'd say it has farther to run," Bruner says.

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Original headline: Wall Street's urge to merge hasn't hit a boiling point yet


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