2012 Mergers & Acquisitions Outlook and 2011 Summary


[2012 M&A Outlook and 2011 Summary]: Originally I was not going to publish this summary on my blog as I never had time to finish it.  But due to readership demand and seeing how my outlook has not changed on M&A for 2012, I’ve decided to just release it as is:


Corporate merger and acquisition (M&A) activity increased in 2011, with an increase of deal making activity as the year progressed. There was a significant rise in the number of deals being made each month in the last 6 months of the year. Major takeover deals occurred almost on a daily basis after the mid-point of the year.  In 2012 I expect more moderate activity, and an increase from larger players with the financial ability to capitalize on opportunities.  We will likely see more deals for individual units, businesses, assets, and ownership stakes.Commodities and the energy sectors will continue to be very active with acquisitions.


Search for Growth Through M&A Continues

In 2011, most big name deals fell between the $1 billion to $10 billion level, with a large number of deals below $1 billion. We can expect this trend to continue in 2012 as companies that stashed away large amounts of cash continue to search for growth through M&A. In 2012, I expect activity to be more moderate as Europe debt worries & China slowdown weigh, causing companies to take conservative stances. Where we expect to see an increase would be from the larger & more confident players who have the financial strength to carry out strategic acquisitions. Though, credit and financing remain available to companies in good financial standing. We can expect to see the larger deals (larger than $10 billion) start to emerge again (though still far fewer than the number of deals valued below this level), with a moderate increase in deals between the $1-$10 billion level. Most deals will still fall below $1 billion.


Units, Assets, Ownership Stakes To Dominate

As uncertainty continues, companies have become more selective and conscientious about how they spend their capital. The majority of deals in 2011 involved acquisition of specific businesses or operational units, as well as individual assets. Companies increased their percentages in existing joint ventures (JV), as well as the purchase of their JV partner’s entire ownership stake. This trend really took off mid way through 2011. It is also a way of limiting the risk involved in full acquisitions. We can expect that the majority of deals for 2012 and likely into 2013 to continue shifting from the merger & acquisition of complete companies, to specific business units, individual assets, and stake increases.

This type of deal was and will continue to increase especially within the commodities industry, specially in mining where the acquisition of land packages, mines, individual projects, and increases in ownership will likely continue through 2012 and into 2013. Larger players look to replenish their pipeline while limiting exploration risks.


2012 Commodities and Energy Sector M&A Outlook

We can expect a moderate increase in consolidation within the commodities industry in general for 2012, as companies are on more secure financial footing than they were 12 months ago. Many companies have increased production and with that revenues have increased. Major players can be expected to continue investing & partnering with junior mining companies with production potential. We can expect that the larger players will also continue to purchase major stakes as well as do complete buyouts.

In 2011 we saw Chinese government and state-owned companies increase purchases of entire companies and stakes in projects.  We can expect continuation of Chinese government or state owned firms purchasing significant stakes in mining related companies or individual projects. It is also a way for them to secure resources, without backlash against attempts to purchase entire companies (which may get rejected by governments where the companies are headquartered).  The Chinese will look to all commodity areas from fertilizer, energy, rare earth metals, copper, etc. despite potential for a Chinese slowdown (as hinted in previous posts). The government wants to secure future resources, and it intends to do so.  In 2011, Chinese state-owned China Petroleum Corp (parent company of Sinopec Group), was actively involved.  It can be expected that they continue into 2012.

In the energy and utility sector, apart from Chinese related deals, it can be expected that M&A activity continue moderately in 2012. Cash rich companies will look to replenish & increase their supply pipeline. Acquisitions still represent one of the methods of expanding market share & supply (in sometimes what is a saturated market), and an attractive alternative & complement to their own internal expansion efforts.

In 2012 we can expect more deals involving commodities trader Glencore International PLC [GLEN], which was a very active player in 2011.


2012 Pension Plans and Private-Equity M&A Outlook

Government pension plans, and other state-owned government investment arms, have increased M&A activity in 2011 and it is likely they will continue at that pace in 2012. One of the main drivers have been low equity valuations, but the increasing realization that they must find new returns growth now in order to fund the increasing obligations of public sector pension programs.  In particular, Canadian pension plans have been significantly active in 2011, and we expect them to continue at the same pace into 2012.  Notable deals in 2011 involving Canadian pension plans included:

• The Canada Pension Plan Investment Board (CPPIB) – the investment arm of Canada’s public pension plan:
[$3.8 billion deal for the TMX Group, $3.25 billion 24.1% stake in Gassled Joint Venture, $469 million 50% stake in Australia’s  Northland Shopping Centre, $285 million 50% stake in Hong Kong Interlink].
• The Caisse de depot et placement – Canada’s largest pension fund manager:
[Approx $200 million stake in Industrial Alliance Insurance and Financial Services Inc., $3 billion offer for Spie, $3.8 billion deal for the TMX Group].
• The Ontario Municipal Employees Retirement System (OMERS):
[$2.1 billion deal for Husky International, 50% stake in London’s MidCity Place, $520 million deal for V.Group].
• The Ontario Teachers’ Pension Plan:
[$564 million increase in stakes of Chilean utilities Essbio and Esval, $807 million 39% stake in Brussels airport and 30% of Copenhagen airport, Babcock Brown Gates Parking Investments LLC, $3.8 billion deal for the TMX Group, 5.2% of McGraw-Hill Cos Inc.].

In 2011 private-equity firms and hedge funds M&A increased significantly.  Although in 2011, I expected deal making activity to increase further in 2012.  I revise that expectation, and expect the same or more moderate level of M&A from these firms.  The reason for my revised outlook is that equity valuations have increased much further in general.  But unlike pension funds, these firms may be more hesitant to make deals.  In 2011, Kohlberg Kravis Roberts & Co. (KKR & Co.) [KKR] has been particularly active.  I expect KKR to continue being one of the more active private-equity firms in 2012, and likely into 2013.  Some notable deals involving KKR in 2011 include:

• Academy Sports and Outdoors deal.
• $2.38 billion deal for Capsugel.
• Sale of Eagle Ford Shale assets of Hilcorp Resources Holdings LP.
• Proposed $1.6 billion offer for Yageo Corp.
• $2.25 billion deal for Go Daddy Group Inc.
• $7.2 billion deal for Samson Investment Co.

Two other private-equity firms I expect to continue being active in 2012 and likely into 2013 are Carlyle Group LP [CG] and The Blackstone Group LP [BX].


2012 Financial Services and Banking Sector M&A Outlook

Takeovers of failed banks in the U.S. through the Federal Deposit Insurance Corporation (FDIC) will likely be less in 2012 than last year, as the majority of consolidation has already occurred. Firms are being much more selective, and also want to limit their exposure to sovereign debt problems. Emerging markets (Latin America, South East Asia) will still be eyed by larger institutions.  Though deals for wealth management or insurance companies by stronger U.S. banks are expected to continue in 2012.  In 2011, Wells Fargo & Co [WFC] had been very active in doing just that, and I expect they will continue in 2012.

In Canada we expect only a few deals (various size), that is due to much smaller number of players. Canadian banks are also bracing themselves for household debt fallout. Canadian household debt levels extremely high. Recent survey showed that if mortgage rates were to increase by 2 basis points, most homeowners would be underwater. Acquisitions by Canadian banks are likely to be on a global basis.

If the Euro Zone continues to deteriorate, that may present some opportunities for stronger financial firms who may make entire buyouts, or may purchase major stakes in distressed European firms. In that case, we may see an increase in activity in this area, otherwise it wouldn’t be expected. Many investors have written off the EZ crisis after bailouts for Greece were established, but it still continues to unfold. Growth is the other major issue compounding the debt problems in that area.

As consumers & businesses continue to evolve towards digital, mobile, and online financial technologies, we can expect to see a continued increase in deals related to mobile & online payments, as consolidation continues in this sub-sector. Major payment firms want to bolster presence in these high growth areas.


2012 Pharmaceutical and Biotechnology Sector M&A Outlook

Consolidation in the pharmaceutical & biotechnology industry continued in 2011, and we can expect activity to continue at relatively the same pace into 2012 and declining in 2013. Most of the transactions will continue to involve the larger (cash rich) players in the industry acquiring smaller ones. Activity will continue to be driven by growth objectives and the need to fill their drug pipeline, as they deal with major patent cliffs and intense competition from generics. In 2012 and into 2013 we should expect to see a continuation of drug specific joint ventures (larger players with smaller firms), as well as the inclusion of contingent value rights or CVRs in takeovers. CVRs compensate the target company for drugs under development in their pipeline if they become successful. They also offset risks to the acquiring company, related to new drug developments (that might not become successful). Firms from emerging markets will also remain targets of larger players who are looking for growth, as they remain the area of highest growth in the industry. As mentioned previously, we can also expect few large-scale mergers between the industry giants (already taken place within the past four years). It is likely that a significant number of deals will involve individual units/divisions, as companies divest non-core assets and focus acquiring units & operations that bolster their core businesses.

In 2011, Valeant Pharmaceuticals International [VRX/VRX] had been particularly active in acquisitions.  I expect Valeant to continue to acquisitions in 2012, and likely into 2013.  Some notable deals involving Valeant in 2011 include:

• Cephalon Inc. (withdrew bid) after Teva offer.
• AB Sanitas (~$422.9 million).
• Dermik ($425 million).
• Ortho Dermatologics division of Janssen Pharmaceuticals Inc. ($345 million).
• Distribution rights for Zuacta.
• Afexa Life Sciences ($85 million).
• iNova Pharmaceuticals ($625 million + A$75 million in milestone payments).
• ISTA Pharmaceuticals Inc. (~$327 million).


2012 Real Estate Sector M&A Outlook

Consolidation in the North American real estate sector (and to a lesser extent globally), will likely continue into 2012.  The most active firms will continue to be the financially stronger companies, who are able to acquire top quality properties, or properties in quality locations.  In 2011, Canadian-based real estate giants, RioCan Real Estate Investment Trust [REI.UN] and Brookfield Office Properties [BPO/BPO] were among the more active players executing strategic initiatives.  I expect them to continue through 2012 and into 2013.


UPDATE: 2011 M&A Summary Notes now available on PRODUCTS PAGEThe notes contain approx 500 M&A entries.

Note: I didn’t cover all industries or sectors this time, but only the ones where wanted to highlight a few specific items or trends.

Note: Keep in mind the information in these articles are not meant to be a set of predictions that are set in stone. It is meant as a discussion of a range of probable scenarios of what we can expect to see happen, based on the information available today. By knowing the likely possibilities, we can plan for them. We can also capitalize on potential opportunities, and not be caught off guard by possible negative events.

FULL DISCLOSURE:  I am long Wells Fargo [WFC], RioCan [REI.UN], Brookfield Office Properties [BPO]. I do not intend to trade shares of the mentioned stocks within the next 3 trading days.

Thanks and Happy Investing! – The Investment Blogger © 2012


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