Fear, loathing in arena of deal-making

Apr 9, 2001  •  Post A Comment

The only numbers worse than those flaunted by the recently erratic stock market are the year-to-date merger and acquisition deal totals for 2001. They are the most grim since 1995, experts say, and unlikely to improve anytime soon.
“There doesn’t seem to be any relief in sight,” said Richard Peterson, analyst for Thomson Financial Securities Data, whose telephone requests from the financial press for deal-related statistics are at a low. “Deal activity has come to a grinding halt.”
Total U.S. deals in all industries in the first quarter of 2001 have totaled $211 billion, way off from $600 billion in the first quarter of 2000. The United States could have its first sub-$700 billion merger and acquisition year since 1995, Mr. Peterson said.
Global merger and acquisition activity in all industries during the first quarter of 2001 has totaled $454.9 billion, less than half the more than $1 trillion in deals in the first quarter of 2000. Global deal-making could strain to reach $2 trillion in 2001, compared with $3.5 trillion for all of 2000, Mr. Peterson said.
The culprits are the weakening and unstable economies of the United States and in other key foreign markets. Historically, low stock prices and uncertain valuations make deal-making difficult. Although money is available and interest rates are low, lenders are cautious about advertising-dependent media companies’ ability to increase revenues and profits. Concern also looms over the downward adjustment of corporate earnings, a global slowdown and economic recession, and uncertainty about Bush administration policies.
Changes in accounting rules and procedures and strengthening consumer and corporate confidence could encourage deal-making, but until then, no industry offers safe harbor. When deals finally return, banks, venture capitalists and other underwriters likely will lend more selectively under stricter terms.
“Deals may get done, but they will get done in a significantly scaled-back fashion,” Mr. Peterson said.
In the first quarter of 2001, overall media, telecommunications, entertainment and Internet mergers and acquisitions have plummeted to $28.7 billion in 553 domestic deals. In the first quarter of 2000, 970 media, telecommunications, entertainment and Internet deals totaled $303.3 billion-which included the mammoth AOL Time Warner merger.
Last year’s first-quarter activity comprised half of the full year’s $609.2 billion total, reflecting more than 3,000 deals in media, telecommunications, entertainment and the Internet. That was an increase from $527 billion in 2,371 deals in the same four industry sectors in all of 1999.
Surprisingly, broadcast deals are on the upswing this year, coming in at $8.7 billion in the first quarter of 2001, up from $5.1 billion in the first quarter of 2000.
Cable television systems and radio stations have contributed to the increase, led by AT&T Broadband cable system swaps and sales, Liberty Media Group’s expanded interest in UnitedGlobalCom, and Rainbow Media Group’s equity partners.
By comparison, other media-sector deal performance has been grim.
Telecom deals are down the most: to $1.6 billion from 72 deals the first quarter of 2001 compared with $23.1 billion from 133 deals in the first quarter of 2000.
Overall, U.S. media and entertainment company deals have fallen to $17.8 billion from 187 deals in the first quarter of 2001, compared with $201.5 billion from 152 deals in the first quarter of 2000.
Internet mergers and acquisitions aren’t nearly as bad as one might expect, coming in at $10.9 billion in 366 deals so far this year, compared with $86.8 billion over 724 deals in the first quarter of 2000.
In stark contrast, publishing deals so far this year have totaled only $139 million, down dramatically from $13.3 billion in the first quarter of 2000.
“The first few months of 2000 were influenced by the announced merger of AOL and Time Warner in January. At the time, deals were healthy, volume was active and premiums were decent. And by summer, the bottom fell out of the deal market,” Mr. Peterson said.
Even so, 2000 yielded several other smart strategic fits: the merger of Viacom and CBS and Vivendi’s acquisition of Seagram and its Universal subsidiary.
But as the dot-com market collapsed and as the NASDAQ started eroding, potential acquirers began to back off from deals because they no longer had their companies’ stocks available to use as currency.
Last year’s deals were driven in part by a rigorous IPO market. In the 15 months since the start of 2000, there have been 24 media-related IPOs (not including Internet-related deals). Nearly half of those occurred in the first quarter of 2000, and the number of media-related IPOs in 2000 totaled $13.3 billion, nearly a quarter of the $60 billion in all-industry IPOs last year overall. So far in 2001, there has been only one media-related IPO, CableVision’s offering of its Rainbow Media Group tracking stock. However, the year so far has managed to eke out $4 billion overall in 24 all-industry IPOs, according to Thomson Financial Securities Data .
In 2000 Goldman Sachs & Co. dominated U.S. media mergers and acquisitions, negotiating 35 deals representing $184.6 billion. Merrill Lynch came in second with $183.7 billion and 28 deals. Morgan Stanley, the prior year’s champ, slumped to $172.6 billion over 41 deals.
The deal market, like the stock market, has fallen off the edge in 2001, however. Although players such as The Walt Disney Co., General Electric’s NBC and USA Networks need to make expansionist moves, only a few sure deals have hobbled into the new year. They include Viacom’s acquisition of BET, News Corp.’s pending acquisition of Chris-Craft Industries and News Corp.’s proposed merger of its satellite assets with Hughes Electronics’ DirecTV.
There generally appears to be a reticence about mega deals, as reflected in a recent KPMG study that suggests 83 percent of big deals do not deliver on the promised synergies that ensure future growth.
In what so far has been a prophetic forecast, Martin Sikora, editor of Mergers and Acquisitions, a quarterly journal published by Thomson Financial Securities Data, said he identified advertisers still hard at work to counter the continued slump in the U.S. economy, the tightening of bank credit, dropping stock prices, an erosion of corporate confidence and an abatement of the urgent pursuit of strategic initiatives.
Among the catalysts that could change things is the availability of private capital, the steady mass market acceptance of new technology, the continued industry consolidation and globalization, a new round of deregulation, the collapse of the market for initial public offerings and the need for more corporate restructuring, Mr. Sikora said.