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Maths, not history, drives mergers and acquisitions
July, 04th 2015

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2015 is the new 2007.” That is the comparison being drawn by dealmakers in the towering offices of bulge bracket banks, and at their boutique rivals, on Wall Street, in the City of London and in Hong Kong. But almost as soon as the sentence is uttered, the bankers quickly add that, this time, the outcome “will be different”.

In many ways, the inputs are different, too. Compared with the boom years for mergers and acquisitions in the mid 2000s, the global economy is weaker, interest rates are at historic lows and many companies are sitting on large piles of cash. What is the same, eight years on, is bankers’ ability to push up valuations — so much so that this year is set to be the strongest for deals since the 2007 peak.

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Steve Baronoff, head of M&A at Bank of America Merrill Lynch, admits that valuations in riskier sectors, such as biotech, are starting to look “toppy” but insists that, overall, most deals in the first half of the year have been carried out for strategic reasons.

Deal sizes, however, have continued to expand. Transactions valued at more than $5bn have increased in number by 42 per cent, as large companies suffering slower growth have turned to dealmaking to boost revenues and market share.

Robert Pruzan and Blair Effron, the Wall Street dealmakers who founded Centerview Partners, say that in fast-moving M&A sectors, buyers are being forced to act sooner rather than later.

“In a rapidly consolidating environment, buyers are moving fast on what is a shrinking pool of targets,” Mr Pruzan says. His partner Mr Effron adds: “This is particularly true in pharma and telecom. Nobody wants to be left without options.”

Recent jostling between the five largest US health insurers shows the effect of this fear on companies. In recent weeks, Anthem made a $54bn bid for Cigna, fearing that its smaller rival might try to do its own deal with Humana. Humana, however, is under pursuit from Aetna, which has offered it more than $30bn. UnitedHealth, the largest US health provider, could yet intervene with a late offer to spoil somebody else’s union.

Joele Frank, founder of the eponymous New York M&A public relations specialist, says it is becoming more common for interlopers to break up their rivals’ deals: “Often, companies spend years studying a potential target, and if somebody else ends up making a bid before they do, it can result in a need to intervene with a more compelling offer.”

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