A Deal-Making Craze? Yes, With Caveats
Are we in the middle of a bull run for mergers?
If you read the front pages of many newspapers on Friday, you’d think so. And the articles are right to some extent: we will most likely see a lot more deals than we’ve had in previous years. But the premise of these pieces is based more on prognostications than a clearly established trend.
The examples cited – the Buffett-Heinz deal, the American Airlines-US Airways merger, Dell’s leveraged buyout and the Comcast-NBCUniversal deal – have virtually nothing in common. They also have very little to do with the trends that bankers on Wall Street say they believe will drive a new cycle of deal-making.
Let’s take each deal one by one.
Berkshire Hathaway’s deal for Heinz, according to Warren Buffett himself, has nothing to do with more confidence in the marketplace, low interest rates or just about any other factor signaling a clear direction for deals.
“It was a one-off opportunity,” he said, dismissing talk of trends. He said if the opportunity had come at any other time, he probably would have taken it. And given that Mr. Buffett is financing a large portion of the deal with his company’s own cash, it is hard to argue that the deal is being driven by easier lending by banks.
Now let’s look at the American Airlines-US Airways tie-up. This deal has been in the works for more than six months. The fact that it happened to occur on the same day as the Berkshire-Heinz deal is just coincidence.
The chief executive of US Airways has been stalking American ever since it put itself into bankruptcy in 2011. About the only thing you can say about the timing of the deal to suggest it is part of a trend is that American’s business improved faster than some had expected, as a result of an uptick in the economy, and therefore had more leverage in its negotiations with US Airways. Rather than emerge out of bankruptcy independent and then merge with US Airways, it chose to merge now. But this deal was always going to happen one way or the other.
How about Dell’s leveraged buyout? This deal is unique. How many companies have a billionaire founder – with billions of dollars of excess cash not tied up in the business – willing to finance taking their company private? That’s Michael Dell.
The company had wild amounts of cash on its balance sheet, so yes, that is a part of a trend of cash-rich companies. But the deal could have never been done without Mr. Dell‘s being willing to put up his own capital. The role of Microsoft as financier had less to do with confidence than defense. Microsoft wanted to keep a main supplier and close ally in business. And the role of Silver Lake is what Silver Lake and other private equity firms have always done.
Comcast’s chief, Brian Roberts, said that he did the deal sooner rather than later because he expected it would cost him more to buy the rest of the business in the future. (Disclosure: I am a co-anchor of “Squawk Box” on CNBC, whose parent company will soon be Comcast solely.)
So there you have it. Yes, we will see a lot more deals based on the “pipeline” that bankers and other deal makers say they see coming. But any crystal ball-gazing should probably discount, at least a little bit, this week’s raft of deals.