Another Merger Monday Signals Pickup In M&A Activity
Another Merger Monday Signals Pickup In M&A Activity
Tuesday, February 10th, 2004
By Peter Loftus, Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--A flurry of merger announcements across various industries Monday could signal an acceleration of business combinations in the months ahead.The highlight was Juniper Networks Inc. (NasdaqNM:JNPR)'s agreement to acquire NetScreen Technologies Inc. (NasdaqNM:NSCN) in an all-stock deal valued at about $4 billion based on Friday's closing stock prices. Juniper sees NetScreen's network-security services as complementary to its own network-equipment line of business.
Among other deals announced Monday, casino operator Boyd Gaming Corp. (NYSE:BYD) said it would acquire Coast Casinos Inc. for $820 million in cash and stock, plus assume $460 million in Coast's debt. Also, photography company Eastman Kodak Co. (NYSE:EK) said it will sell its remote-sensing systems unit to ITT Industries Inc. (NYSE:ITT) for $725 million in cash.
One could call it "merger Monday," that staple of the mergers-and-acquisitions boom of the late 1990s, when weekend dealmaking and savvy public relations produced frequent merger headlines on Monday mornings.
After a quiet few years for M&A, some huge deals have been announced in the last few months. In the banking industry alone, J.P. Morgan Chase & Co. (NYSE:JPM) agreed last month to acquire Bank One Corp. (NYSE:ONE) for about $58 billion, and in October Bank of America Corp. (NYSE:BAC) agreed to acquire FleetBoston Financial Corp. (NYSE:FBF) for about $43 billion.
But M&A experts say the recent deals appear to be more rational than in the late 1990s. And they expect them to accelerate throughout the year.
"I think you're seeing renewed activity in M&A as the economy improves," said Morton Pierce, an M&A attorney at Dewey Ballantine in New York. "You've got the ingredients to make for a decent M&A market."
He noted that the rise in the stock market has allowed companies to use their own stock as "currency" to buy other companies, as the Juniper-NetScreen deal illustrates.
Also, some companies have big cash reserves to pursue all-cash deals, while borrowing cash is still relatively cheap.
Armed with cash and stock currency, more companies are turning outward, Pierce said. The weak economy of recent years had caused many companies to turn inward, making sure their own houses were in order. That's partly why M&A was nearly dormant from 2001 through early 2003.
Now, with prospects improving, companies are searching for ways to expand through M&A.
"M&A was almost dormant for the past 2 1/2 years," said Ken Marlin, president of Marlin & Associates, an investment-banking firm in New York. "We began to see it become more active in the third quarter of last year. We would expect to see a continuing increase, but not to the level of the late '90s."
Marlin said there are more willing buyers in the market than sellers. That's because companies that are considering selling themselves are still recovering from economic weakness. They're hoping that if they wait for their earnings to increase over the next year, they'll earn a higher valuation in a takeout, Marlin said.
This reluctance of sellers has caused some buyers to agree to pay higher valuations for their targets, Marlin said. Indeed, the Juniper-NetScreen deal valuation looks relatively high. Based on Friday's closing prices, Juniper valued NetScreen at $41.37 a share, well above NetScreen's market price of $ 26.40. In early afternoon trading Monday, NetScreen was up 38% to $36.35, while Juniper was off 10% to $26.50.
"What we've seen is a marked increased in multiples over the last several months, but only for strong targets," Marlin said.
Still, Pierce thinks companies are taking a more cautious approach to M&A than they were in the late 1990s. New regulations spawned by various business scandals are prompting companies to take longer and do more due diligence before closing deals, he said.
"Now there's more caution about due diligence and exploring any issue that might be a potential problem," he said.
- Peter Loftus; Dow Jones Newswires