In the last 18 months alone, strategic buyers such as pharmaceutical giant Pfizer Inc. and beverage behemoth InBev NV have put well over $1 trillion to work acquiring some 11,235 U.S. targets, according to Thomson Reuters, publisher of Buyouts.
To be sure, that pace marks a come-down from the 14,101 strategic acquisitions that closed for about $1.7 trillion during the prior 18-month stretch. But the strategic M&A market in the United States has weathered the storm far better than the LBO market. During the last 18 months, financial sponsors on a global basis closed only 1,681 acquisitions of U.S. targets for a disclosed value of $85.4 billion, down from 2,494 deals and a disclosed value of $676.9 billion in the prior 18-month period, according to Thomson Reuters.
So what’s going on? With the leveraged lending markets all but halted, financial buyers that rely at least partly on leverage to generate their projected returns have found themselves at a competitive disadvantage at auctions. Strategic acquirers with strong balance sheets, for example, can make acquisitions without raising any debt financing at all. And with purchase price multiples bogged down due to the recession, many cash-flush strategic buyers view this as the right time to build synergies and gain market share while their competitors may be in a weakened state.
All told, strategic acquirers accounted for a whopping 93 percent of all M&A within U.S. borders over the past 18 months—up from 71 percent in the prior 18-month period spanning July 1, 2006 to Dec. 31, 2007, according to Thomson Reuters. Investment bankers have certainly taken notice. Some have even scaled back on inviting general partners to their auctions, tailoring them instead to a purely strategic audience.
“Corporate America was sitting on some huge piles of cash in 2007 and 2008, and many of them still have pretty healthy balance sheets,” said Robert Brown a managing director at Lincoln International, a Chicago investment bank. “A lot of our processes today are for businesses that either can’t get financing because there just isn’t that much debt out there or they’re for businesses that would only be able to attract such a low level of debt that financial sponsors would have a difficult time competing for them.”
Hiter Harris III, a co-founder of mid-market investment bank Harris Williams & Co., said strategic buyers make up approximately 70 percent to 75 percent of his firm’s buy-side universe today, up from the typical 50 percent. “We’re running a number of sale processes where it’s all strategic,” Harris said. Without disclosing details, Harris said his firm is working on an auction that, just two years ago, would have received very little corporate interest. Corporations “would have assumed private equity groups would bid it up to multiples beyond anything they’d want to pay,” he said. “But now we have terrific corporate interest; they just view this as their time.”
The upside for LBO players, of course, is that they have a ready-made exit market. Of the 69 total exits clocked by U.S. buyout shops in the first six months of 2009, 60 of them involved strategic buyers, according to data from Thomson Reuters.
Consider Verizon Wireless’s $28.1 billion acquisition of wireless communications provider Alltel Corp., which closed in January and is by far the largest LBO exit of the year. Buyout firms
By disclosed value, the second and third largest exits of the year were
Among the most active strategic acquirers, those that have bought portfolio companies from buyout shops in the past 18 months include tech giants Oracle Corp, Microsoft Corp, and Hewlett-Packard Co. Capital goods providers CRH PLC and Republic Services Inc. have also acquired portfolio assets from financial sponsors, along with communications companies DirecTV Group Inc. and San Francisco bank Wells Fargo.
By industry focus, health care, which many consider a recession-proof industry, drew the heaviest dollar interest by far from strategics. The industry, which includes medical device and drug manufacturers as well as service providers, saw $280 billion in disclosed buy-side spending over the last 18 months—more than any other sector—to close 999 deals, according to Thomson Reuters data.
Financial services saw a total of 1,705 deals. Those with disclosed values were worth a total of $229 billion, making the sector the second most-active market both in terms in the number of deals closed and the amount of money spent.
The most active market for strategics in the United States was technology, which saw the 2,204 deals close for a disclosed $84.7 billion. Other key areas were consumer products and services, which was host to 1,165 deals and a total disclosed deal value of $20.8 billion; and industrials, which churned out 1,147 deals with a combined disclosed value of $41.2 billion, according to Thomson Reuters.