Mergers and Acquisitions

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In a move that stunned Wall Street, Microsoft Corp. on May 10 agreed to buy Skype Technologies S.A. for $8.5 billion in cash to gain ownership of the world’s most popular Internet calling service. The deal raised eyebrows because of its high valuation, especially at a time when the economic recovery remains fragile.

But it didn’t surprise Steven Koch, co-chairman of mergers and acquisition at the Swiss investment bank Credit Suisse. Rather, says Koch, the deal underscores a heating M&A market as companies try to use up huge amounts of cash hoarded over the past two years to either expand their businesses or diversify, thereby improving their competitive advantage. “The M&A market has been growing. Last year, we grew twenty-five percent and we are up fifty percent year to date. So the market is building momentum,” he says.

The trend, which could be good news if new jobs will result, can be seen in other recent huge deals. Among these is Hertz Global Holdings Inc.’s new bid for Dollar Thrifty Automotive Group Inc., which values Dollar Thrifty at nearly $2.1 billion in cash and stock, more than 30 percent higher than Hertz’s previous bid and far above the $1.7 billion bid from Parsippany, N.J.-based Avis Budget Group Inc. In September, Hertz, the No. 2 U.S. car rental company based in Park Ridge, N.J., walked away from a bidding war against its rival, Avis, for Dollar Thrifty, only to return on May 9 with an offer far above what shareholders say could have sealed the deal back then. Hertz’s new bid values Dollar Thrifty at $72 per share, driven by the fact that the economy has turned a corner.

In February, The Huffington Post, the New York media website, agreed to be acquired by AOL Inc. for $315 million. At the same time, U.S. oil explorer LINN Energy said it had agreed to acquire oil and gas assets in the Texas and Oklahoma region for $220 million.

The financial services sector is not left behind either. Brokerage firm Sterne Agee Group, based in Birmingham, Ala., recently announced the purchase of an out-of-state community bank and filed to become a bank-holding company, following its peers in building a banking business. Just as the largest U.S. commercial banks have crossed over into brokerage and money management, Sterne Agee and a number of other brokerages like Raymond James, SWS Financial, and E*Trade Financial have acquired or started their own lending units.

Perhaps Deutsche Böerse’s plans to enter the U.S. market by purchasing majority shares in NYSE Euronex and Nasdaq’s attempt to highjack that deal with a counteroffer represent how much M&A landscape has changed since the 2008 financial crisis. Deutsche Böerse officially made an offer on May 4, starting a 10-week clock under German law for the two companies to satisfy all conditions for the merger except regulatory approvals. NYSE shareholders must approve the combination by July 12 to comply with the deadline.

Elsewhere, U.S. discount retailer Wal-Mart Stores Inc. has made a $2.4 billion bid to take over local retailer Massmart, a South African retailer, with the deal expected to be approved by regulators soon. Wal-Mart has won approval from Massmart shareholders, leaving approval by competition authorities as the final hurdle. South Africa’s Competition Tribunal could approve the deal anytime soon, but with conditions that could include ordering Wal-Mart to freeze job cuts at Massmart for a number of years and to keep existing Massmart supplier agreements. One of South Africa’s major concerns stems from Wal-Mart’s global sourcing network, which, it says, could flood the country with cheap imports, undermining local suppliers and threatening food security. If the government imposes conditions on the deal, Wal-Mart could accept them, challenge the ruling in court or walk away from the deal. But with the U.S. retailer facing slow growth in its home market, analysts say it is unlikely to walk away from fast-growing Africa.

Globally, M&A activity at $591 billion total value in the first quarter of 2011 was up 29 percent from a year-earlier level, according to the London market research firm Mergermarket. U.S. M&As, valued at a combined $268.4 billion, was up 85.1 percent from the year-earlier level, the biggest quarter in nearly four years, the firm notes.