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54anickel Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Jan-07-05 10:03 AM
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36. 2005 shaping up as a year of big deals
Edited on Fri Jan-07-05 10:04 AM by 54anickel
Economic climate makes mergers and acquisitions desireable again /

Remember the urge to merge? Quelled since 2000, it's coming back. In the last quarter of 2004, deals for U.S. companies came at a trillion-dollar-a-year pace and more are in store. Companies are looking to mergers again to cut costs, boost efficiency, and extend their reach.

Although mergers dropped off starting in 2001 a victim of recession, corporate scandals, and a sluggish stock market the animal spirits have returned. The past month alone saw deals for Sprint to combine with Nextel for $39 billion, Johnson & Johnson to pay $25 billion for device maker Guidant, and Exelon to acquire Public Service Enterprise Group for $12 billion. And on Dec. 28, Blockbuster Inc., backed by financier Carl Icahn, threatened a hostile tender offer for No. 2 video-rental chain Hollywood Entertainment Corp.

Deal grease
Behind the comeback: A robust economy and soaring corporate profits have boosted stock prices and cash. In other words, there's plenty of deal grease around. Other factors are at play, too. The weak dollar makes U.S. assets more inviting to foreigners. Stricter governance standards are forcing poorly performing CEOs and boards to entertain unwanted offers. And in a repeat of the 1990s, deals are spawning more deals as companies scramble to keep up in consolidating industries. While it's a good bet that at least some acquirers will overpay or make bad choices, few are holding back.


There's plenty of money for deals. The Standard & Poor's 500-stock index companies, including financial companies, have a record $2 trillion in cash and other short-term assets, according to S&P Compustat. Close to 60 percent of the U.S. deals in 2004 were paid for with cash, vs. around 35 percent in 2000, estimates Stefan M. Selig, vice-chairman of Banc of America Securities, the investment banking arm of Bank of America Corp.

Not all the cash is coming from corporate coffers, though. Hedge funds, which traditionally focused on short-term speculation, are getting into the act. Buyout shops are putting to work about $100 billion they raised in the late 1990s. And private investment funds such as Edward S. Lampert's $9 billion ESL Investments Inc. are picking up marquee companies. In November, Kmart Holding Corp., which was 53 percent owned by ESL, said it would buy Sears, Roebuck & Co. for $11 billion.

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