the era of globalized m&a
DESCRIPTION
Study on global M&A by JPMorgan and Thomson ReutersTRANSCRIPT
The era of globalized M&AWinds of change
JUNE 2009
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 3
All inquiries should be directed to any of theindividuals at J.P. Morgan or Thomson Reuterslisted below.
Sam BridgesAssociate10 Aldermanbury, London EC2V 7RF0207 325 0545
Hernan CristernaManaging Director10 Aldermanbury, London EC2V 7RF0207 325 4631
Vincent FlasseurDeals Intelligence, TR30 South Colonnade, London, E14 5EP0207 542 1958
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 4
Table of contents1. Introduction 2
2. M&A Vs ECM 3
3. Cross-border 5
4. Deals consideration and valuation 8
5. Sector analysis 14
6. Private equity fund raising 17
7. Summary observations 19
1The era of globalized M&A
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 1
2 Winds of change
1. IntroductionIn this research document we have examined the M&A cycle from a period starting from1990 through to May 31 2009 to quantify the effects of globalization on M&A and theimpact of macroeconomics. This timeline covers two very distinct cycles of M&A dealactivity, taking a look at the telecoms bubble of 1999-2000 and the leverage bubble of2005-2007. The report aims to reaffirm that high valuation bubbles are the precursor to a swift downturn and that rapid consolidation across non-cyclical sectors are on thewhole prevalent during peak M&A.
Speculators have played a significant role in two cycles identified in this report. Theycontributed to the over-valuation of technology and telecoms stocks in the “dot.com” eraand piled into commodities and real estate during the bull market of 2007 which againled to over valuation above normal inflationary rises.
The dot.com bubble origins can be traced back to around 1995 when venture capitalspawned numerous technology companies which followed the rapid expansion of theinternet. When these companies were IPO’d the demand from investors resulted inunrealistic valuations based on flawed earnings projections. The emergence of privateequity in 2005 and highly leveraged transactions as a result of cheap debt was alsoaccompanied by speculators fuelling real estate and driving up commodity prices. Thetiger economies of Asia and the demand for oil and steel further added to the inflatedcommodity prices and sub-prime lending in the consumer market added to thedislocation in the credit markets. So the two M&A cycles we have identified were bornefrom very distinct bubbles and rapid global growth.
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3The era of globalized M&A
2. M&A Vs ECMThe correlation between the equity markets and global M&A was evident across globaland regional analysis. Global deal value has been tracking the volatility of the equitymarkets, lagging on average by one quarter. This assessment is true by both value andnumber of transactions and has tracked the equities market since 1990. While growth inthe equity markets encourages M&A to grow at similar rate, a consequence of fallingconfidence in the equity markets is that M&A activity dries up.
Exhibit 2.1
Exhibit 2.2
M&A deals v. equity market performance
0
2,000
4,000
6,000
8,000
10,000
12,000
1Q90
3Q90
1Q91
3Q91
1Q92
3Q92
1Q93
3Q93
1Q94
3Q94
1Q95
3Q95
1Q96
3Q96
1Q97
3Q97
1Q98
3Q98
1Q99
3Q99
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0
2,000
4,000
6,000
8,000
10,000
12,000
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Datastream world index (monthly avg.)Global M&A (No. of deals)
Source: Thomson Reuters
M&A value v. equity markets performance
0
200
400
600
800
1,000
1,200
1,400
1,600
1Q90
3Q90
1Q91
3Q91
1Q92
3Q92
1Q93
3Q93
1Q94
3Q94
1Q95
3Q95
1Q96
3Q96
1Q97
3Q97
1Q98
3Q98
1Q99
3Q99
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0
200
400
600
800
1,000
1,200
1,400
1,600
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Datastream world index (monthly avg.)Global M&A ($bn)
Source: Thomson Reuters
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4 Winds of change
Looking at the US and Europe the correlation between M&A and the equities market wasthe same as the global view, however it was quite noticeable that spikes in certainquarters, for example in the fourth quarter of 1999, which the $111 billion acquisition ofWarner-Lambert by Pfizer contributed disproportionably higher deal value than in morenormalized quarters. The same was true for Europe when the fourth quarter of 1999produced the biggest ever M&A deal in Vodafone’s acquisition of Mannesmann for $171billion.
Exhibit 2.3
Exhibit 2.4
M&A value v. equity markets performance
0
100
200
300
400
500
600
700
1Q90
3Q90
1Q91
3Q91
1Q92
3Q92
1Q93
3Q93
1Q94
3Q94
1Q95
3Q95
1Q96
3Q96
1Q97
3Q97
1Q98
3Q98
1Q99
3Q99
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
0
500
1,000
1,500
2,000
2,500
3,000
0
100
200
300
400
500
600
700
0
500
1,000
1,500
2,000
2,500
3,000
Datastream European mkt. index (monthly avg.)EU targeted M&A ($bn)
Source: Thomson Reuters
M&A value v. equity markets performance
0
100
200
300
400
500
600
700
800
1Q90
3Q90
1Q91
3Q91
1Q92
3Q92
1Q93
3Q93
1Q94
3Q94
1Q95
3Q95
1Q96
3Q96
1Q97
3Q97
1Q98
3Q98
1Q99
3Q99
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0
100
200
300
400
500
600
700
800
0
200
400
600
800
1,000
1,200
1,400
1,600
Datastream US mkt. index (monthly avg.)US targeted M&A ($bn)
Source: Thomson Reuters
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 4
5The era of globalized M&A
3. Cross-borderThe era of cross-border M&A heralded in part the opportunity to grow outside thedomestic market with protectionism against national interests diluted in a number of keymarkets. Cross-border activity is more prevalent in upturns as shown in the below exhibit,accounting for over 35% market share of all global M&A in 1999 and then accounting for45% of all M&A in 2007.
Exhibit 3.1
The total number of cross-border deals peaked in both the dot.com bubble and theleverage bubble, topping out at around 3,500 transactions in both time periods.
Exhibit 3.2
European targeted cross-border activity by number of deals grew almost on a yearly basisfrom 1990 until 2000 tailing away until the upturn in activity from 2005-2007. Emergingmarkets (EM) cross-border activity grew from almost non-existent levels in 1990 andfollowed the same pattern of growth until 2000. North American cross-border activity hasremained conservative in comparison to Europe and the emerging markets with thenumber of transactions flat until around 1994.
Cross-border M&A
0
200
400
600
800
1,000
1,200
1,400
1,600
1Q90
3Q90
1Q91
3Q91
1Q92
3Q92
1Q93
3Q93
1Q94
3Q94
1Q95
3Q95
1Q96
3Q96
1Q97
3Q97
1Q98
3Q98
1Q99
3Q99
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
No. of cross border dealsGlobal M&A ($bn)Cross border M&A ($bn)
Source: Thomson Reuters
Cross-border M&A
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
% of totalGlobal M&A ($bn) Cross border M&A ($bn)
Source: Thomson Reuters
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6 Winds of change
Exhibit 3.3
US acquirors have also recorded lower cross-border M&A which accounted for a high of34% in 2003 but has fallen every year since 2006 despite the accelerated growth in M&Aat the time. European cross-border M&A as a percentage of the total peaked in 1991 withactivity accounting for 75% of all M&A but in recent times has moderated to around 55%of total cross-border deal activity. Emerging markets acquiror cross-border activity hasrecorded year-on-year growth since 2004 with a marginal decline in 2007 but post 2007,activity in cross-border deals has outstripped the US for a second year in a row.Cross-border activity in 2009 year-to-date now stands at 28% of total M&A, with Europefalling to around 40%, we may yet see emerging markets become the leading region foracquisition based M&A.
Exhibit 3.4
However despite the percentage gains in cross-border activity as a total of M&A, as themarket for deals declines further then value of cross-border also falls. The number ofEuropean cross-border deals by acquiror has recorded the highest fall of 56% from thesecond quarter 2007 until the end of May 2009 while the US fell by 49% and emergingmarkets by 37%. US cross-border deal value fell by 54% during the same time period withemerging markets falling 48% and Europe with a less severe fall of 21%.
Cross-border M&A by acquiror ultimate parent nation/region
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090%
10%
20%
30%
40%
50%
60%
70%
80%
US value ($mm) Western EU value ($mm) EM value ($mm)
US % of total Western EU % of total EM % of total
(US$mm) (%)
Cross-border M&A–US v. Western Europe v. emerging markets
0
100
200
300
400
500
600
1Q9
03Q
90
1Q9
13Q
91
1Q9
23Q
92
1Q9
33Q
93
1Q9
43Q
94
1Q9
53Q
95
1Q9
63Q
96
1Q9
73Q
97
1Q9
83Q
98
1Q9
93Q
99
1Q0
03Q
00
1Q0
13Q
01
1Q0
23Q
02
1Q0
33Q
03
1Q0
43Q
04
1Q0
53Q
05
1Q0
63Q
06
1Q0
73Q
07
1Q0
83Q
08
1Q0
9
0
200
400
600
800
1,000
1,200
1,400
1,600
0
100
200
300
400
500
600
0
200
400
600
800
1,000
1,200
1,400
1,600
EM target (No. of deals)EM target ($bn)
Western EU target ($bn)US target ($bn) Western EU target (No. of deals)US target (No. of deals)
Source: Thomson Reuters
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7The era of globalized M&A
Exhibit 3.5
Exhibit 3.6
Cross-border M&A by acquiror ultimate parent nation/region
0
100,000
200,000
300,000
400,000
500,000
600,000
1Q90
1Q91
1Q92
1Q93
1Q94
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
US value Western Europe value EM valueUS (no. of deals) Western Europe (no. of deals) EM no. of deals
(US$mm) (No. of deals)
Cross-border M&A by acquiror ultimate parent nation/region
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090%
10%
20%
30%
40%
50%
60%
70%
US value ($mm) Western EU value ($mm) EM value ($mm)
US % of total Western EU % of total EM % of total
(%)(US$mm)
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 7
8 Winds of change
4. Deals consideration and valuationM&A as a percentage of GDP gives an indication of the relative overheating of themergers and acquisitions market compared to the rest of the economy. Over the past twocycles global M&A activity consistently outgrew the World economy during two keygrowth periods (1999-2000) and (2005-2007). Equally, the level of announced M&Aactivity collapsed at a much faster pace than the World Economy upon each subsequentdownturn. Looking back at the 1999-2000 peak, M&A as a percentage of GDP reached itsupper limit after 7 years of continuous growth and stagnated for 2 years at 10% to finallycollapse and return within 2 years to 4%. In contrast, between 2006 and 2007, whilstM&A was at an all time high level, the same ratio found a new upper limit at 8% andfollowed the same 2 year high-plateau pattern before suddenly collapsing with the creditcrisis in 2008.
It is probably worth noting that, against the generally accepted conception, the level ofmerger activity reached during the first M&A TMT-driven bubble, though significantlysmaller in absolute $ value was in fact of greater proportion relative to the worldeconomy than the latest credit-driven cycle we’ve just gone through.
Based on the hypothesis that the M&A/GDP pattern could repeat itself global activity as % ofGDP could reach 3.6%, 3.7% & 4.5% in 2009, 2010 and 2011 respectively, mirroring theupturn of 2002, 2003 and 2004. When matched with IMF GDP forecast for the same yearsthis could mean that M&A activity could return to slow growth as early as this year and nextand eventually reach US$2,622bn by 2011.
Exhibit 4.1
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0%
2%
4%
6%
8%
10%
12%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
0%
2%
4%
6%
8%
10%
12%
Global M&A as % of world GDPGlobal M&A ($bn)
Estimates Based on Previous M&A Cycle
& IMF Forecast
Source: Thomson Reuters
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9The era of globalized M&A
Exhibit 4.2
The use of all cash consideration has grown on an almost annual basis except for 2003with a peak in 2007 of 46% of total M&A. All share deals have declined almost at thesame rate that cash grew from 2000 with a slight rebound in 2008 but falling to 7% oftotal M&A. Hybrid or mixed consideration of cash and shares has seen a surge from 2008accounting for 28% of the total M&A.
Global bid premiums continue to grow despite the current downturn. The one monthmedian is 33% compared to 22% at the height of deal activity in 2007.
Exhibit 4.3
The current high premiums can be explained by the two exhibits below. Taking exhibit 4.4for example and we can see that the market has undervalued Eidos stock relative to theindex performance. However the offer price in this example has factored in the stockundervaluation and the implied premium is reduced as the index performance picks up byweek 6 (post announcement date). In exhibit 4.5 we can see that BPP has beenundervalued when rebased against the index performance, so the implied premiumwould appear higher.
Global bid premiums 1995-2009 year-to-date
0
5
10
15
20
25
30
35
40
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
One-day % median One-month % median
M&A considerations
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
All shares (% of total) All cash (% of total) Hybrid (% of total)
Source: Thomson Reuters
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 9
10 Winds of change
Exhibit 4.4
Exhibit 4.5
The upward trajectory of the dot.com M&A started in 1997 and ended in 2000 while theemergence of private equity started around 2001 and peaked in 2006. Globally TMTM&A activity for the period 1999-2000 rally accounted for 45% of the total M&Aannounced. Private equity accounted for about 22% of the total M&A market during apeak in 2006. In the US TMT accounted for 48.3% of all M&A while private equityequalled around 25.4%. In Europe, TMT made up 34.2% of total M&A and private equityaccounted for 18.7%.
BPP stock performance rebased against AIM
0
100
200
300
400
500
600
700
01/01/2009 26/01/2009 20/02/2009 18/03/2009 12/04/2009 07/05/2009 02/06/20090
50
100
150
200
250
300
350
400
450BPP AIM
Eidos stock performance rebased against AIM
0
5
10
15
20
25
30
35
01/01/2009 26/01/2009 20/02/2009 18/03/2009 12/04/2009 07/05/2009 02/06/20090
5
10
15
20
25Eidos AIM
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 10
11The era of globalized M&A
Exhibit 4.6
TMT deal activity was driven by all share deals in the dot.com period and then cashaccounted for 60% of all TMT deal value in 2007.
Exhibit 4.7
TMT M&A considerations
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
10%
20%
30%
40%
50%
60%
70%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0%
10%
20%
30%
40%
50%
60%
70%
All share (% of total)TMT M&A ($bn) All cash (% of total)
Source: Thomson Reuters
Global M&A drivers
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
TMT acquisitions as % of totalGlobal M&A ($bn) Buyside financial sponsor as % of total
Source: Thomson Reuters
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 11
12 Winds of change
Exhibit 4.8
The global squeeze on the money markets from mid 2007 through to 2009 year-to-datehas had major repercussions for M&A. Correlating against previous downturns on aglobal scale proved difficult but looking at a regional level and we saw similaritiesbetween the Japanese banking crisis and the global credit crunch.
The Japanese banking crisis of the 1990’s was caused by an overvalued Japanese stockmarket, financial liberalization and deregulation. By 1997 several large financialinstitutions failed and went into bankruptcy with the recapitalization and fiscal cost ofrepairing the banking industry estimated at about 12% of GDP. Financials accounted forabout 70% of all Japanese targeted M&A in 1999, at the height of the crisis. The parallelsbetween the Japanese crisis and the credit crunch which started in the summer of 2007are quite stark. Liberalization of the financial market and the abundance of creditinflated a debt bubble which unbalanced the global economy. Coupled with low interestrates, low unemployment above inflation year-on-year growth in real estate, recordearnings in the oil & gas industry and strong equity markets, pushed M&A to recordlevels during the second quarter 2007.
Key M&A drivers for the dot.com bubble and the leverage bubble
0
200
400
600
800
1,000
1,200
1,400
1,600
1,80019
90
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
TMT acquisitions as % of totalUS targeted M&A ($bn) Buyside financial sponsor as % of total
Source: Thomson Reuters
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 12
13The era of globalized M&A
Exhibit 4.9
The cyclical nature of certain sectors has also had a profound impact on global M&A.TMT at its height in 1999 accounted for over 55% of total M&A deal value while the lastpeak of M&A in 2007, TMT deal value comprised of just 16% of total M&A. Financialinstitutions have on the other hand peaked either prior or post the height of M&A in1999 and again 2007.
In the US, TMT followed the global trend of peaking in the 1999 boom and then decliningin the last boom in 2007. Financial institutions appear to have no cyclical characteristicsand tend to be volatile in activity.
Japanese banking crisis
0
50
100
150
200
250
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
50
100
150
200
250
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Financials as % of totalJapanese target M&A ($bn) Financial target M&A ($bn)
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 13
14 Winds of change
5. Sector analysisExhibit 5.1 Exhibit 5.2
Exhibit 5.3 Exhibit 5.4
Financials acquisitions
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0%
5%
10%
15%
20%
25%
30%
35%
Financial as % of totalUS targeted M&A ($bn)Financial targeted M&A ($bn)(000’s)
Source: Thomson Reuters
TMT acquisitions
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
TMT as % of totalUS targeted M&A ($bn)TMT targeted M&A ($bn)(000’s)
Source: Thomson Reuters
Financials acquisitions
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
0%
5%
10%
15%
20%
25%
30%
Financial as % of totalGlobal M&A ($bn)Financial targeted M&A ($bn)(000’s)
Source: Thomson Reuters
TMT acquisitions
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
TMT as % of totalGlobal M&A ($bn)
TMT targeted M&A ($bn)(000’)
Source: Thomson Reuters
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 14
15The era of globalized M&A
In Europe TMT again peaked in 1999 and fell away again during the last upturn in 2007.With lower debt to equity compared to other sectors, TMT is long overdue another roundof consolidation.
Exhibit 5.5 Exhibit 5.6
Global healthcare has experienced 4 cycles of increased M&A activity, the first in 1995, thesecond in 1999, the third in 2003 and the last cycle started during the first quarter of 2009and currently accounts for over 25% of global M&A. Utilities is not a cyclical sector withsustained periods of activity since 1990 but especially from 1995 until the present day.
US healthcare activity has been limited to 3 very distinct spikes with the latter spikeforming part of the activity in the first quarter of 2009 and accounting for nearly 75% ofthe total deal value.
Exhibit 5.7 Exhibit 5.8
Utilities acquisitions
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Utilities as % of totalGlobal M&A ($bn)Utilities targeted M&A ($bn)(000’s)
Source: Thomson Reuters
Healthcare acquisitions
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Healthcare as % of totalGlobal M&A ($bn)Healthcare targeted M&A ($bn)(000’s)
Source: Thomson Reuters
Financials acquisitions
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
Financial as % of totalEU targeted M&A ($bn)Financial targeted M&A ($bn)(000’s)
Source: Thomson Reuters
TMT acquisitions
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0%
5%
10%
15%
20%
25%
30%
35%
40%
TMT as % of totalEU targeted M&A ($bn)TMT targeted M&A ($bn)(000’s)
Source: Thomson Reuters
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 15
16 Winds of change
Exhibit 5.9 Exhibit 5.10
Exhibit 5.11 Exhibit 5.12
Healthcare acquisitions
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0%
10%
20%
30%
40%
50%
60%
Healthcare as % of totalUS targeted M&A ($bn)Healthcare targeted M&A ($bn)(000’s)
Source: Thomson Reuters
Utilities acquisitions
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0%
5%
10%
15%
20%
25%
Utilities as % of totalEU targeted M&A ($bn)Utilities targeted M&A ($bn)(000’s)
Source: Thomson Reuters
Healthcare acquisitions
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0%
2%
4%
6%
8%
10%
12%
14%
Healthcare as % of totalEU targeted M&A ($bn)Healthcare targeted M&A ($bn)(000’s)
Source: Thomson Reuters
Utilities acquisitions
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
1%
2%
3%
4%
5%
6%
7%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0%
1%
2%
3%
4%
5%
6%
7%
Utilities as % of totalUS targeted M&A ($bn)Utilities targeted M&A ($bn)(000’s)
Source: Thomson Reuters
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17The era of globalized M&A
6. Private equity fund raisingDespite the fact that the PE buyout market was adversely impacted immediately as aconsequence post June 30 2007, buyouts dropped away as the credit markets contractedand financing became difficult and expensive, however 2007 and 2008 were effectivelythe two largest years in history for PE and buyout fundraising in terms of capitalcommitted to funds. Given that investors in PE are aware that PE investment is acomparatively long term game the shock to PE investment activity did not impact fundinvestment returns with anything like the same ferocity or velocity. Due to the cumulativeeffect of the PE boom in subsequent years of the decade PE firms were still deliveringmarket leading returns post credit crunch, the driving force behind them being able toattract unprecedented levels of fund raising.
These conditions now leave PE firms in an extraordinary situation whereby they havenever had more ‘dry powder’ (unspent fund commitments) yet have barely ever had amore challenging environment in which to try to invest and realise investments with thevirtual disappearance of the IPO market, sales to strategic buyers hampered by uncertainmarkets and low M&A activity and little access to cheap and easy leverage, the tenant onwhich the buyout business model has thrived.
The bulk of PE fundraising in the years leading up to, and subsequent to, the credit crisis,is buyout fundraising. In the dot.com boom, however, which peaked in 2000, the sameyear that the highest number of new funds have ever been raised, the majority of newfunds were VC, and not buyouts. This was likely due to the desire to capitalize and investin dot.com start ups.
PE has, for a number of years, been considered to be a driver of M&A activity and thisseems to be true in a negative as well as a positive sense as it is clear that PE fundraisingstrategy manifestly reflects the mistakes and does not predict or escape from thedownturns in the market, but rather demonstrates clearly an over exuberance in theboom market rather than any prophetic insight prior to the subsequent busts.
What is clear is that if anything like favourable conditions return to the credit marketsthere is all likelihood that PE activity will return as quickly as it disappeared as PE firmsare finally able to spend the huge amounts of money for which they have commitments,and once again contribute something akin to the 20-25% of total M&A volume as per theyears preceding the credit crisis. If they can take advantage of depressed exit multiples inthe meantime and acquire assets at favourable values they may be able to offsetsomewhat the lack of leverage available which previously allowed for such successfulreturns.
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18 Winds of change
Exhibit 6.1
Historical volumes of syndicated loans and leveraged loans illustrate the growingimportance and availability of this asset class as a financing instrument for corporations.Barely affected during the previous M&A downturn (2001-2002) syndicated loansissuance grew for 5 consecutive years fuelled by the even faster growing leveragemarket culminated in 2007, just before the credit crisis.
Exhibit 6.2
Private equity fund raising
0
100
200
300
400
500
600
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
¹
0
500
1,000
1,500
2,000
2,500
0
100
200
300
400
500
600
0
500
1,000
1,500
2,000
2,500
No. of PE fundsAll private equity fund raising ($bn)Buyout & Mezzanine ($bn)
Venture capital ($bn)No. of Buyout & Mezzanine funds
No. of VC funds(000’s)
Source: Thomson Reuters
Leveraged loans issuance
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
0%
5%
10%
15%
20%
25%
30%
35%
40%
Leveraged loans as % of totalGlobal Syndicated loans ($bn) Leveraged loans ($bn)(000’s)
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 18
7. Summary observationsSeveral important trends have emerged during the globalization of M&A:
• The correlation between the equity markets and M&A is self-evident. When the stockmarkets rally, it is inevitable that M&A activity increases in line with the pace of theequity markets
• Bubbles are nearly always prevalent during peak M&A. We have seen this in theJapanese banking crisis which saw inflated real estate valuations. The dot.com bubbleof 1999 and more recently the leverage and real estate bubble in 2007 have all fuelledM&A directly and indirectly
• We should expect to see further M&A activity in sectors like healthcare and TMT whichappear to consolidate during downturns
• During the dot.com cycle, M&A contracted for approximately 8 quarters before M&Arebounded. The credit crunch cycle is so far through 7 quarters of contraction whichcould see total M&A bottom out during the second quarter of 2009
• Cross-border M&A trends track those of total M&A trends
• In M&A cross-border activity tends to outgrow or decline at a faster rate than thegeneral trends
• M&A is confidence-driven rather than opportunity driven as demonstrated by the surgeand decline in activity relative to the broader macroeconomic environment
• The percentage of cross-border M&A activity has been demonstrably high (above 20%)for the last two decades
• Western Europe is the primary driver of cross-border activity. US targeted cross-borderactivity disproportionately deteriorates during downturns. As it stands US targetedactivity accounts for only 10% of global cross-border activity, a level not seen since 1992
• Emerging markets demonstrates growing maturity and currently outpaces the USmarket both in terms of target and acquiror cross-border activity
• In real terms the most recent boom and bust in M&A was not as high as the previousdot.com boom as a percentage of global GDP
• As expected the consideration of choice in the lead up to the dot.com bubble was in theform of all share deals whereas the leverage bubble was driven by cash only deals
• The current high premiums are artificially high due in part to stock undervaluation
• In 2000, TMT acquisitions accounted for up to 45% of all M&A activity. In 2006 financialsponsors accounted for up to 20% of total M&A, demonstrating the two drivers of thelast two M&A cycles
• The financial crisis in Japan in the late nineties led to rapid financial consolidationwhich culminated in financial targeted M&A comprising 70% of the total Japanese M&Amarket in 1999
• Despite the fact that the PE buyout market was adversely impacted as a consequenceof post June 30 2007, in fact 2007 and 2008 were effectively the two largest years inhistory for PE and buyout fundraising in terms of capital committed to funds
19The era of globalized M&A
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Disclaimer
Note: The information contained herein is based solely uponpublicly available information, including informationprovided by Thomson Reuters. All market statistics arebased on deals announced through 01/01/1990 with datasourced on 31/05/2009. In contested transactions, only thehighest offer is counted. Partial purchases are included ifthey exceed $100mm or involved an advisor. Data canchange from quarter to quarter as a result of updates orreclassifications made by Thomson Reuters. Numbers invarious tables may not sum due to rounding. Distribution ofthis report is permitted to J.P. Morgan’s Investment Bankingclients, subject to approval by J.P. Morgan. This edition ofthe M&A Review reflects recent changes to achieve globalstandardization in our commentary. The most important ofthese is a shift to use of “target volume” rather than“involved volume” for European M&A. Although many tracktotal European M&A activity by combining European targetvolume with European acquisition volume of non-Europeantargets (“European involved volume”), this countsnon-European target deals twice in any global analysis, i.e.,in European volume and in the volume of the target regionwhich, for Europeans, is primarily the United States, but alsoCanada and Latin America. With the “target” approach, allregion totals add to the global total, but European volumesappear lower in this report than in past editions due to thischange. We have also conformed our definitions of the TMTand industrials sectors globally by moving aerospace volumeout of the technology sector (i.e., TMT) in the United Statesand into the industrials sector. We have standardized ouranalysis of premiums to measure the “one-day” announcedpremium and the “one-month” premium in both Europe andthe United States. Throughout we use the “announced andnot withdrawn” classification of Thomson ReutersThomson Reuters makes no representation or warrantyregarding the accuracy or completeness of any informationprovided in this report and any reliance you place on suchinformation will be at your sole risk. This report does notconstitute a recommendation to buy or sell securities of anykind. In no event will Thomson Reuters or its third partysuppliers be liable for any damages of any kind, includingwithout limitation, direct or indirect, special, incidental, orconsequential damages, losses or expenses arising inconnection with your use of the report. You may notdistribute or sell this report to any third party without theconsent of Thomson Reuters
The following mergers and acquisitions analysis document isa research initiative and collaboration between ThomsonReuters and JP Morgan.
Copyright 2009 JPMorgan Chase & Co. All rights reserved.
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