Return of mega-mergers reflects growing confidence in economy


The Saks Fifth Avenue logo is displayed at the company's store in New York. Canada’s largest-department store chain, Hudson’s Bay, agreed to buy Saks for $2.4 billion. (Scott Eells/Bloomberg)
August 5, 2013

Luxury retailer Saks agreed last week to be bought by Canada’s largest department store, Hudson’s Bay, for $2.9 billion. On the same day, pharmaceutical company Perrigo paid $6.7 billion for Irish biotechnology firm Elan. A day earlier, advertising companies Omnicom and Publicis decided to join forces to create a $35 billion market giant.

The recent spike in activity reflects the return of the mega-merger and a gradual uptick in business confidence in the economy, analysts say. It has been most evident in the ongoing battle for Dell computers, with founder Michael Dell upping his bid for the company to $25 billion Friday, and the high-profile buyout of H.J. Heinz by Warren Buffett’s Berkshire Hathaway.

Although the number of mergers is down compared with the corresponding period last year, a series of mega-mergers has helped increase the value of merger activity in 2013 to $607 billion, from $486 billion during the corresponding period in 2012.

Activity is picking up after an uneventful 2012, when no mega-mergers were announced, analysts said. But it is still far from 2011 levels, when low valuations contributed to a rush for deals.

The availability of cheap corporate loans is helping spur the rebound in deals this year. The U.S. Corporate Bond Index reached its lowest levels this year on June 25, meaning that companies could borrow money more cheaply.

Mergers and acquisitions since 2009.

This is allowing many companies to pay cash rather than swapping stock to complete a deal. In 2012, more than 70 percent of mergers were paid for with cash, compared with 56 percent in 2009, according to FactSet Mergers data.

This year “could play out as a battleground between cash only and stock swap deals, at least in the mega-merger arena,” FactSet Mergers said in a recent research note.

Some of the biggest deals since 2009 have taken place in the health-care sector, as the industry consolidates. Hospitals in particular are bracing for the effects of the Affordable Care Act, which is expected to put pressure on their profit margins, analysts said.

Last week, Community Health Systems agreed to buy Health Management Associates for about $3.6 billion in cash and stock, a long-expected union of the two for-profit hospital systems. The biggest merger since 2009 was in the pharmaceutical industry: the $68 billion acquisition of Wyeth by Pfizer. The second biggest was Abbot Technologies’ deal to sell its AbbVie division to shareholders for $64 billion.

Most mergers since the recession have focused on building efficiencies through cost-cutting and increasing market share by expanding to new markets and segments, analysts said. However, the merger wave is raising concerns that big companies could also gain too much control over the market and raise prices on consumers.

Britt Beemer, chairman and chief executive of American Research Group, said that with its acquisition of Saks, Hudson’s Bay gained access to a valuable and loyal customer base in the United States, as Saks “is chasing a small percentage of the market, the top 6 to 7 percent of American consumers.”

But consumers probably won’t notice. “It won’t make much difference to the consumer,” Beemer said. “But it will provide credit lines with vendors for Saks.”

Some mergers have the potential to create market dominance. According to analysts, that appears to be the case in the merger of leading advertising agencies Omnicom and Publicis. The merger is expected to create the world’s biggest advertising company, with a market value of $35.1 billion.

This merger “brings in a new level of scale and consolidation in different parts of the media and advertising business,” Larry Chiagouris, a professor of marketing at Pace University’s Lubin School of Business in New York, said in a recent research note.

Direct competitors “will not be able to remain in place as is,” he said, but will need “greater size in order to maintain bargaining power” when working with agencies.

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