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M&A hits record $4 trillion this year, and momentum seen boosting stocks in 2007

M&A hits record $4 trillion this year, and momentum seen boosting stocks in 2007

The stock market's big 2006 advance gave a boost to more than investment portfolios _ it fueled a frenzied pace of mergers and acquisitions, with hedge funds and private equity shops sending the total value of acquisitions to a staggering $4 trillion (euro3.04 trillion).
This set a record for M&A, besting the dot-com boom in 2000, when the value of deals totaled $3.3 trillion (euro2.5 trillion), according to M&A tracking firm Dealogic. It gave Wall Street bankers a lot to smile about, especially given the astronomical bonuses doled out this year.
But, the little guy wasn't exactly left out either. All the robust acquisition activity gave investors confidence in corporate profits, and has helped send the Dow Jones industrial average to a record 12,000 and beyond.
The deals are expected to continue into 2007.
"It's hard to have one record breaking year after another, but even if the number of deals slow, you'll still see extremely large levels of deal flow in absolute terms," said Howard Horowitz, director of research for Water Island Capital, which manages the Arbitrage Fund. "Deals are getting bigger and bigger. Cash levels will be comparable to this year, if not above it."
There were 31,825 deals this past year _ about 800 more than in 2000, according to Dealogic. Private equity firms contributed to 18.4 percent of all the deals in 2006, spending a record $725.3 billion (euro550.7 billion) to take companies private.
Participation by these buyout shops has injected the market with a massive amount of liquidity, analysts said. And companies, many fed up with scrutiny from investors and regulators, have been willing to become private companies.
Firms like Kohlberg Kravis Roberts, which engineered the buyout of RJR Nabisco in 1989, are flush with cash to go shopping with. It is said that private equity firms head into the new year with some $2 trillion (euro1.52 trillion) in buying power.
KKR _ along with Bain Capital Partners and the buyout unit of Merrill Lynch & Co. _ in July secured the biggest deal in history with the acquisition of hospital operator HCA Inc. The deal was valued at $30.6 billion (euro23.2 billion), including the assumption of debt, and set the bar higher.
And bankers worked until the final days of 2006 in pulling off the seventh-largest private equity deal of the year. Apollo Management and Texas Pacific Group secured a $17.1 billion (euro13 billion) agreement to take Harrah's Entertainment Inc. private.
The big five Wall Street investment banks had record profits in 2006, and their chief financial officers all say there are still plenty of deals to be made.
"There's still a lot of confidence out there," said Morgan Stanley Inc. CFO David Sidwell after the company reported a full-year profit of $33.86 billion (euro25.71 billion). "You can't make predictions if 2007 will be able to top 2006, but company executives that we talk to are still very eager to do deals."
This kind of resolve is a good thing for the stock markets. Investors moved aggressively into equities because companies are turning in double-digit profits, and the strong M&A momentum means chief executives are feeling optimistic.
"All of this consolidation is forcing companies to run a tighter ship, and that's good for investors and everybody else," said Ryan Larson, senior equity trader with Voyageur Asset Management. "People want to invest in companies that are running more efficiently, and that drives the markets higher."
He believes institutional and retail investors alike might have been caught of guard by the sheer magnitude of M&A during the year. But in 2007, they will be prepared to snap up shares in sectors seen ready for consolidation.
The intense acquisition activity is driven by the surplus of cash held by private equity firms and public companies. With members of the Standard & Poor's 500 having about $608 billion (euro461.6 billion) in cash, the whiplash pace of M&A will likely go on.
Analysts say this new money pumped into the market will help major stock indexes continue their momentum.
"We're really not in the business of predicting where the stock markets go," said Horowitz, whose fund invests only in companies involved in M&A. "But, it really props up the market and ultimately is validated by the continued strength of these companies."


Updated : 2021-04-13 13:28 GMT+08:00