Dealmakers Tiptoe Back into the M&A Market

Is dealmaking back? The Masters of the Universe took a serious beating last year from the financial crisis and recession. Merger and acquisition volume worldwide dropped to $2.9 trillion in 2008, from $4.2 trillion the year before, according to research firm Thomson Reuters (TRI).

Yet despite the recent run of negative economic news, there may be some reason for optimism. With the credit markets perking up and stocks at record lows, buyers and sellers are once again circling each other in the well-known ritual of dealmaking. In late January pharmaceutical giant Johnson & Johnson (JNJ) acquired breast implant maker Mentor for $1 billion. Three days later drugmaker Pfizer (PFE) agreed to buy rival Wyeth (WYE) for $68 billion. "Expect a feeding frenzy," predicts Robert A. Profusek, head of global mergers and acquisitions at law firm Jones Day.

Pruning Tool

M&A activity often has to bounce back before the credit markets and the broader economy can recover fully. Deals are a critical tool for eliminating weaker players and wringing out excess capacity. They're also a signal of confidence, which can encourage other buyers and investors to jump back into the market. "The resurgence in dealmaking is the market's way of pruning the weak companies from the strong," says Paul Weisbrich, senior managing director at Costa Mesa (Calif.)-based investment bank McGladrey Capital Markets.

In preparation for a shopping spree, top-rated companies are issuing debt. Hewlett-Packard (HPQ) sold $2 billion worth of bonds in December, in part to pay for potential purchases. Overseas players, which are benefiting from a relatively weak dollar, are showing an interest in U.S. acquisitions. There's speculation that Singapore's sovereign wealth fund, Temasek Holdings, is eyeing the aircraft-leasing unit of insurer AIG (AIG).

Private equity firms, which helped fuel the last M&A boom, have an estimated $250 billion at their disposal for buyouts. Despite taking hits on holdings such as Huntsman (HUN) and casino Harrah's Entertainment, buyout shop Apollo Management recently raised $15 billion for a new investment fund. "Private equity money has been silently piling up and will start chasing new targets," says Weisbrich.

With stocks getting slammed, buyers will have plenty of attractively priced assets to consider. Even the best-performing sectors last year, health care and consumer staples, lost 24% and 17%, respectively. The raft of bankruptcies only adds to the supply of potential targets. "You have a very unusual situation where everything is on sale," says Donald B. Marron, CEO of private equity firm Lightyear Capital.

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