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Corporate mergers up, but effect acquisitions may have on job market is unclear

By Jia Lynn Yang
Washington Post Staff Writer
Monday, December 27, 2010; 10:10 PM

Snapping a three-year slowdown, the corporate world's appetite for dealmaking has returned.

The volume of global mergers this year rose 19 percent, according to Dealogic, ticking up for the first time since 2007 as firms looked for ways to deploy the record amount of cash sitting on their balance sheets.

But because companies often shed jobs when they combine, this renewed enthusiasm for mergers and acquisitions could spell trouble for some workers. Already, after cutting big deals this year, executives have announced thousands of job cuts or hinted that layoffs are on their way.

Conditions are ripe for a comeback in mergers and acquisitions because U.S. companies are holding a record nearly $2 trillion in cash. They have been hesitant to use these massive piles of funds to hire as they wait to see whether the economic recovery picks up more speed. Instead, this year they've been making safer bets: buying back stocks to help boost their share prices and spending money on modestly sized mergers.

The deal market, however, is still far from its glory days before the financial crisis, when global mergers totaled $4.6 trillion in 2007. By comparison, this year, deals are on track to surpass $2.7 trillion, according to Dealogic, which tracks corporate mergers and acquisitions.

"Eighteen months ago there was definitely fear. And at least we've moved from fear to caution," said Robert Profusek, global head of mergers and acquisitions at the Jones Day law firm. "Anything in the right direction makes you feel better than a year ago."

Despite the uptick in overall deals, the number of large deals fell from 2009. The dollar value of deals bigger than $5 billion dropped 10 percent globally and nearly 40 percent in the United States, according to an analysis by the investment bank Moelis.

"I thought 2010 would be stronger than it was. It was okay," Profusek said. "People really weren't swinging for the fences."

Jeff Raich, a managing director at Moelis, said companies are still somewhat nervous about deploying cash.

"Deals are taking longer," Raich said. "Buyers are more cautious. Sellers are concerned about getting appropriate valuations. Boardrooms have become more selective and more careful in dealmaking."

Still, deal volume in the United States rose more than 10 percent this year to $883 billion. Emerging markets delivered particularly strong growth, with deal volume rising 56 percent from 2009 and accounting for 32 percent of the global total - the highest share on record, according to Dealogic. China was the most targeted emerging-market nation, with a 4 percent rise from last year.

Oil and gas companies were the busiest compared with other industries, with the highest volume on record for the sector. Goldman Sachs led investment banks in transactions handled, logging $564 billion in deals, or 21 percent of the market.

Some corporate mergers this year have been shadowed by fears of layoffs.

Shareholders of United Airlines and Continental Airlines in September approved a merger between the two companies that would form the world's biggest airline. Executives have hinted that there will be job cuts when the airlines combine operations but so far haven't provided any numbers.

Abbott Laboratories announced in September it would cut 3 percent of its workforce, or 3,000 jobs, after its $6 billion purchase of Solvay's pharmaceuticals division, an acquisition that closed in February. The company said it will close Solvay's former U.S. headquarters for its pharmaceuticals unit in Marietta, Ga., by the end of next year.

And Oracle, after paying $7.4 billion to acquire Sun Microsystems, indicated in regulatory filings in June that it needed to spend more than expected on workers' severance payments, between $550 million to $650 million, associated with the purchase. The company did not say how many jobs would be cut.

Yet recent surveys of corporate executives show they expect to spend more money in the new year - on both acquisitions and hiring.

The Business Roundtable said 59 percent of chief executive members surveyed in the fourth quarter this year expect higher capital spending in the next six months, compared with just 40 percent a year ago. In addition, 45 percent said they expect to increase hiring in the next six months.

"Demand is returning as evidenced by anticipated sales increases, and that is good news. When demand increases, capital expenditures and employment follow - which is what we expect to see in the next six months," said Ivan G. Seidenberg, chairman of the Business Roundtable and chief executive of Verizon Communications. "However, our CEOs expect [gross domestic product] to grow at a rate of only 2.5 percent in 2011, so there is still more work that needs to be done to get the economy back on the path toward strong, sustainable growth."

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