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Technology, media and telecoms
Media moguls like few things better than dealmaking, but in 2009 they made fewer deals than since the dotcom doldrums of 2003-04. They had reason to suppress their usual instincts: some of the deals they did just before the credit crisis are among the highest-profile failures seared into investors’ memories, writes Andrew Edgecliffe-Johnson.
PwC found that $77bn (£51bn, €56bn) of media deals were completed last year – down by half on 2008 as an advertising slump forced a focus on cost cutting. This year, however, the need for elusive top-line growth is driving a revival in mergers and acquisitions, concentrated in a few sub-sectors.
Cable networks have been rare bright spots in many conglomerates’ results, making channels such as USA Network and Bravo a drawcard for Comcast in NBC Universal.
Advertising agencies are once more the focus of deal speculation, and Hollywood’s need to bulk up to face a declining DVD market and a complex digital transition has set off a studio consolidation. After Disney’s takeover of Marvel, the auctions of MGM and Miramax have attracted interest from groups such as Time Warner and News Corp.
Activity has also been strong in business media. The 2007 bids for Reuters and Dow Jones, by Thomson Corporation and News Corp, respectively, raised expectations of further consolidation among information providers, but finance for such deals dried up since soon after those deals were struck.
That process has now begun, with CME’s bid for Dow Jones Indexes, MSCI ’s offer for RiskMetrics and several private equity firms examining Interactive Data Corp, which is controlled by Pearson, owner of the Financial Times. Follow-on deals look plausible. With several media buyouts from the 2006 and 2007 vintages underwater, private equity owners may turn to consolidating mergers as a way to recoup their investments.
Media groups are still looking for faster-growing international markets, as symbolised by News Corp’s investment in Rotana, a Saudi broadcaster. Their efforts so far have been dwarfed, though, by emerging market moves in the telecommunications sector. After Vivendi’s €2.8bn (£2.5bn) bid for GVT, a Brazilian broadband operator, Bharti Airtel, the Indian telecoms group, struck a $10.7bn deal for the African assets of Kuwait’s Zain.
Deals such as T-Mobile’s UK merger with Orange have been a response to slowing growth in developed telecoms markets. The true test of the health of technology, media and telecoms M&A markets, however, will be whether such a deal happens in the US this year.
Pharmaceuticals and healthcare
After the feast, the digestif. Though 2009 marked an unprecedented period for large-scale takeovers in the healthcare sector, the months ahead are likely to see more modest transactions. Last year brought an extraordinary range of mega-mergers, with Pfizer paying $68bn (£45bn, €50bn) for Wyeth, Merck $41bn for Schering-Plough, and Roche spending $47bn to buy out the minority shareholders in Genentech. Those deals overshadowed others that, in a more typical year, would have garnered greater attention, writes Andrew Jack.
“I would be surprised if there is substantially more large-scale M&A this year,” says Alexis de Rosnay, vice-chairman of Lazard International. “The natural predators have made their moves, although we will continue to see a good flow of mid-size transactions.”
Among the larger firms still tipped to launch ambitious takeovers is Sanofi-Aventis, though Chris Viehbacher, chief executive, has said he is more likely to focus on smaller purchases. The French group’s $2bn takeover of US-based Chattem and its purchase of Czech group Zentiva and Kendrick in Latin America were typical of an industry trend for niche deals aimed at diversifying geographical reach and product range at a time of pressure on core patented medicines.
GlaxoSmithKline has focused on periodic “bolt-on” acquisitions, whether paying $4bn to buy Stiefel Laboratories, the US dermatology company, or purchasing the rights to rivals’ product portfolios in specific markets, such as Bristol-Myers Squibb in Pakistan and Egypt. It has sealed licensing deals with generic companies and biotech groups by taking equity positions, such as in Aspen of South Africa.
There has also been a new trend for risk-sharing deals. GSK created ViiV Healthcare, a joint venture with Pfizer, for its HIV products. AstraZeneca and Merck have combined forces around cancer drugs, and Eli Lilly brought in Quintiles, the world’s largest clinical research organisation, as an investor in drug development.
A few large deals remain outstanding. Novartis is to complete its $50bn purchase of Alcon, the US eyecare company, this year. Sanofi-Aventis hopes to renew its animal health joint venture with Merck in an enlarged joint venture.
Emboldened by Daiichi Sankyo’s purchase of the Indian generic company Ranbaxy, more international deals by Japanese companies are possible. There is some scope for fresh generic purchases – including Ratiopharm of Germany and possibly Iceland-based Actavis – while European mid-size companies such as Lundbeck and Nycomed could be bought.
One wildcard is Bayer, which could be broken up under its new chief executive. But, like Eli Lilly and others with protective shareholder structures, such deals will not be easily imposed by outsiders.
Excluding government-led deals, financial services deals hit a six-year low in 2009, according to PwC. But, says the consulting firm, that is about to change. The deal by Prudential, the UK-based insurance group, to buy AIA, the Asian arm of AIG , the stricken US insurer bailed out by the US authorities in 2008, for $35.5bn (£23.6bn, €25.9bn) is just the start, writes Kate Burgess.
Just €80bn-worth (£73bn-worth) of mergers and acquisitions was announced last year, compared with €178bn in 2008 and €208bn in 2007. Of that, government-led bank rescues accounted for €41bn in 2009 and €70bn the year before. However, PwC says “a restructuring-led wave of deal activity has started to gather momentum across the financial services industry”, which will be led by the private sector. It reckons British banks may become the targets of overseas buyers. It also believes impending changes to EU regulations on the solvency of insurers will lead to insurance groups rethinking strategies to improve capital efficiency models.
Nevertheless, one UK banker warns: “There is a danger in being simplistic. There are a lot of regulatory, economic and political forces pulling in different directions and a lot of moving parts.”
For example, he says, current rules allow banks effectively to double-count insurance assets on balance sheets, a practice that minimises the capital they have to hold. Business chiefs may question the benefits of the bancassurance model, but only once the rules change in a couple of years.
European M&A advisers agree on four general trends. The first is that banks that have taken state aid will be forced to sell assets. Second, most big financial groups in Europe are retreating to their heartlands – the Pru’s bid for AIA aside.
Third, the asset management industry is consolidating. One UK lawyer says banks are looking at selling low-margin, high-volume “plumbing and infrastructure businesses” that provide custody and settlement services while absorbing capital. A few big businesses are watching out for such deals. State Street, the custody bank, last year underlined its ambitions to become the market leader in Europe by buying Italy’s Intesa Sanpaolo’s securities servicing business for €1.75bn in cash.
Meanwhile, financial conglomerates are examining whether to shake loose their asset management arms amid toughening regulatory and capital requirements. Industry-changing deals, such as BlackRock’s acquisition last year of Barclays Global Investors, will be hard to replicate. But some independent managers, such as the UK’s Aberdeen Asset Management, will look to pick up assets on the cheap. The chief executive of a European asset management group says he has been approached by several US asset managers looking to expand in Europe.
A fourth trend, say advisers, is the paucity of buyers prepared to pay the prices that sellers want. According to one lawyer: “Businesses that require balance-sheet support and absorb high levels of capital will struggle to find buyers.”
Without more certainty about markets and regulation, “there will be a lot of hesitancy”, says a US banker. “There may be bursts of activity in 2010, but there won’t be a return to the boom times.”
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