Shoppers may be looking for things to put in their carts this week,
but companies are being much more cautious as they look for businesses
Food-processing giant ConAgra along with real-estate
companies Equity Residential and AvalonBay announced Tuesday their plans
to make multibillion-dollar acquisitions. While these deals may be
noteworthy, they top off what's been a relatively stable year for
This year, there have been 10,346
U.S. merger-and-acquisition deals worth $859.2 billion, says Dealogic.
While that's a 9% improvement in the number of deals, it's an 8% decline
in terms of the dollar volume.
Such ho-hum merger activity
underscores how companies' CEOs are reluctant to use their near-record
pile of $985 billion in cash to take on the risk of growing by buying
other companies with promising products or technology, says Roger
Aguinaldo, CEO of The M&A Advisor.
Seeing the lack of growth
in deal activity makes it somewhat of an outlier, as other measures of
corporate health, including earnings, dividends and cash, have all
rebounded to record levels, says Aguinaldo. Market observers are looking
at the flat to slow growth in M&A activity to be a sign of:
• Rising role of "strategic" buyers. Most
deals are coming from large companies looking for smaller ones to buy
and bolster a niche of their business, says Scott Adelson, senior
managing director of investment bank Houlihan Lokey. Companies are less
willing to take on the risk of giant "transformational" deals in the
current environment, he says.
The two deals Tuesday were examples: ConAgra bought Ralcorp,
a maker of privately branded food products for $5 billion, while Equity
Residential and AvalonBay together paid $6.5 billion for Archstone, an
apartment real-estate company owned by Lehman Bros. Holdings, for $6.5
• Big uncertainties. With big question marks over
taxation and the fiscal cliff looming, companies are more apt to hold
cash than make big acquisitions, says Richard Peterson of S&P
Capital IQ. And many large deals might also have been put on hold since
it was an election year, says Hemang Desai, professor of accounting at
Southern Methodist University.
• Cross-currents in the economy. Investors
are viewing the late-year uptick in merger activity as a positive, says
Robert Maltbie of Millennium Asset Management. Earnings growth, though,
is slowing, which makes investors wonder whether M&A activity might
Some expect mergers to pick up in December as
sellers loosen up to lock in their tax rates before any potential
increases, Peterson says.
But Aguinaldo isn't hopeful. "Companies are taking a moment to see what's going on. It's like a long pause," he says.