Frozen credit, market turmoil put mergers on ice

[October 20, 2008]  WASHINGTON (AP) -- The once frenzied pace of corporate acquisitions in many industries has come to a near standstill in the face of frozen credit and plunging global financial markets. The volume of withdrawn bids also has skyrocketed to record levels, leaving it unclear when the merger market will pick up again.

Buyers are more choosy, agreements already in the works have been put on hold, and some big corporate takeover bids have been scrapped as companies focus more on protecting their own financial health than risking a big deal.

"It's almost like everyone has taken a deep breath in and they are collectively waiting to exhale," said Cherie Smith Homa, head of investment banking in the corporate finance division of KPMG, which advises companies on mergers. "There is a lot of pause in the market right now."

Mitchell Hollin, a partner in the $1.4 billion Philadelphia private equity firm LLR Partners, said the group is taking a much closer look at potential buyouts, pursuing only companies with proven management teams in sectors that could withstand an economic drop, such as those involved in critical health care.

"There is such a great level of uncertainty in this environment that buyers are hesitant to pull the trigger," he said. "The downside of passing on a good deal at this point is not nearly as great as the downside of doing a deal that doesn't work out."

Some cases this month show companies feel the same way:

• Waste Management Inc. dropped its lengthy pursuit of rival Republic Services Inc. The deal could have been worth $6.7 billion, but Waste Management said the current market turmoil made it no longer "prudent" to chase Republic.

• Aerospace and building equipment conglomerate United Technologies Corp. ended its unsolicited, $2.6 billion bid for Diebold Inc., saying it could not get enough financial information from the ATM and voting machine maker.

• Walgreen Co. bowed out of its struggle with CVS Caremark Corp. for Longs Drugs Stores Corp., saying in part that the financial meltdown prompted it to rethink its $2.8 billion bid.

The crisis also has affected some pending deals, including Belgian brewer InBev SA's planned $52 billion takeover of Anheuser-Busch Cos. InBev last week said it was postponing a $9.8 billion share issue to help finance the transaction until markets calmed. InBev still expects to close the deal by the end of the year as planned, but did not set a new date for the share issue.

Smaller mergers and buyouts -- those ranging from around $25 million to $500 million -- also are being put on hold, said Homa. Deals that are closing mostly had financing in place before the crisis.

The third quarter saw 339 deals withdrawn, a record number followed closely by the 328 mergers and acquisitions that fell apart during the second quarter, according to data collected by Dealogic, which provides information to investment banks. The value of deals pulled globally in the first 13 days of October was $57.6 billion -- during which time the Dow Jones industrial average fell 13 percent -- and almost matched the $62 billion in deals withdrawn for all of September.

Mergers and acquisitions activity is at its lowest level in many years, said Gregg Nahass, a partner at PriceWaterhouseCoopers and head of the division that helps integrate companies during mergers. Many companies looking to sell have yet to drop prices to realistic values, private equity firms that once dominated the takeover market are having trouble raising funds because of the credit slowdown, and investments banks that help put together funding for deals are struggling just to survive.

"Almost any deal is at risk at this point," Nahass said.

Valuations will have to drop and credit loosen before the market can pick up again, and that may not happen until the second half of 2009, analysts said. But there will eventually be some good deals, especially in distressed companies that have to shed some of their parts or need help to survive.

Some sectors are booming, but more by necessity than choice. With many banks and investment houses ailing and scrambling for capital, some deals involving major financial institutions have been announced in recent weeks. Those include Wells Fargo & Co.'s planned buyout of Wachovia Corp., and Bank of America Corp.'s $35 billion purchase of Merrill Lynch.

Elsewhere, CVS on Friday said it has enough shareholder support to close its $2.7 billion buyout of Longs. And Republic said Friday it has nearly completed its purchase of Allied Waste Industries Inc. after Waste Management dropped its unsolicited bid for Republic. But the all-stock agreement, worth $6.07 billion when it was announced in June, is now valued at $4.35 billion because of the stock market swoon.

Other deals have experienced some added drama as they move to closing. A merger between the British software company Misys PLC and the clinical software provider Allscripts Healthcare Solutions Inc. was nearly derailed by the collapse of Lehman Brothers at the end of September. Lehman was to provide $330 million for the merger, but that funding disappeared when the investment bank field for bankruptcy protection.

Misys scrambled to put together a new financing arrangement, which involved a $175 million investment from a current Misys shareholder and money from a consortium led by the Royal Bank of Scotland. The deal closed earlier this month, two weeks late.

"There were some anxious moments," said Allscripts Chief Executive Glenn Tullman. "This is the toughest market in history to raise money in. People are going back to the fundamentals when they evaluate the strength of the deal."

[Associated Press; By STEPHEN MANNING]

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