Six years after financial crisis, mega-merger fever is back on Wall Street

Actavis CEO Brenton Saunders (right) and Allergan CEO David Pyotton (left) are interviewed by CNBC on the floor of the New York Stock Exchange on Nov 17, 2014. Pharmaceutical giant Actavis has said it would pay US$66 billion (S$86 billion) for Allerg
Actavis CEO Brenton Saunders (right) and Allergan CEO David Pyotton (left) are interviewed by CNBC on the floor of the New York Stock Exchange on Nov 17, 2014. Pharmaceutical giant Actavis has said it would pay US$66 billion (S$86 billion) for Allergan, which makes the wrinkle-eraser Botox. -- PHOTO: REUTERS

NEW YORK - Mega-merger fever is back on Wall Street, six years after the financial crisis, and 2014 is shaping up as a record year for takeovers in a sign of US corporate optimism.

In rapid succession on Monday, pharmaceutical giant Actavis said it would pay US$66 billion for Allergan, which makes the wrinkle-eraser Botox, and oilfield services company Halliburton said it would take over rival Baker Hughes for US$34.6 billion.

Times have never been riper for big deals, mergers-and-acquisitions bankers told AFP.

"A number of factors are driving M&A activity, including low-cost financing, strong equity markets, more confidence in corporate boardrooms, and an increasingly competitive deal landscape, where many organizations do not want to be left behind," said Mark Shafir, co-head of Global M&A at Citigroup.

Jack MacDonald, co-head of Americas M&A at Bank of America Merrill Lynch, explained that companies are making strategic acquisitions outside their core businesses in order to accelerate growth.

Mergers and acquisitions around the world so far this year have hit US$3.16 trillion, according to Dealogic, the highest level since the record year of 2007.

More than a third of those transactions have taken place in the United States.

Deals have been largest in sectors where the entire industrial landscape is shifting fast.

In technology, the cash-laden tech giants like Facebook, Google and Yahoo are constantly on the prowl for startups to prevent rivals from getting ahead of them.

In pharmaceuticals, generic drug makers like Teva and Mylan are challenging huge companies like Pfizer, which is suffering from the expiration of patents on flagship medications.

Nearly US$384 billion in transactions have been recorded in the drugs sector since January, up 45.5 per cent from a year ago, said Dealogic.

The number would have been bigger if AbbVie had not dropped its US$54 billion bid for Shire after the US government took action to hinder "inversion" deals focused on relocating a US company to a cheaper tax domicile like Ireland via a merger.

In telecoms, deals are being driven by cable and cellphone companies' need to build national subscriber bases as they compete to deliver entertainment content to users across different platforms.

Cable operator Comcast is buying rival Time Warner Cable for US$45.2 billion, while AT&T is merging with Direct TV in a deal valued at US$48.5 billion.

The media and entertainment business has also been part of this frenzy.

Over the summer, media mogul Rupert Murdoch's 21st Century Fox reluctantly gave up its nearly US$80 billion bid to buy rival Time Warner - the former parent of Time Warner Cable.

With rivals so hungry, some companies "do not want to be left behind," said Shafir.

Ultra-low interest rates, the result of central banks' expansionary monetary policies, are helping to drive the takeover fever. To finance deals, companies can easily raise billions of dollars in cheap debt.

Also supporting the deals are the strong stock markets, which boost the value of the buyers and their targets.

US corporate chiefs, free of fears of another recession unlike their counterparts in Europe and Japan, are much more willing to go on the hunt, said MacDonald.

This deal fervor also comes out of the return of "activist investors" who take up big stakes in target companies with the aim of shaking up management and pushing them into merger deals or, at times, breakups.

For example, investor Bill Ackman joined with a Canadian firm, Valeant, in an effort to take over Botox maker Allergan for $US60 billion. After brushing them off, Allergan ultimately delivered itself into the arms of Activis this week for US$6 billion more than that.

In many cases, the big deals have a social cost. Microsoft is going to eliminate 18,000 jobs as part of its $7.5 billion acquisition of Nokia. And Halliburton's takeover of Baker Hughes is described as providing areas for cuts and cost-savings from overlapping businesses.

But the deals are cash cows for big banks and law firms. Goldman Sachs, Bank of America, JPMorgan Chase and Credit Suisse will share US$316 million in commissions for arranging the Halliburton-Baker Hughes and Actavis-Allergan deals.

Tougher regulations and higher interest rates could rain on the party, but MacDonald says it should go on for a while.

"We believe the momentum around mergers will continue well into 2015 provided no severe macro shocks to the global economy," he said.