Merger Mania

November 19, 2014

From today’s online WSJ, Gerard Baker

Merger Mania

Companies are taking advantage of rising stock prices to secure big takeovers. Yesterday was one of the busiest days for mergers in years with more than $100 billion in deals. At roughly $3.1 trillion so far in 2014, the current dollar volume of announced mergers and offers globally is higher than in any full year since 2007, data show. Our story examines the factors behind this year’s surge in M&A volume and reports on the latest activity, including Actavis agreeing to buy Botox-maker Allergan and Halliburton.

Further to my blog of 7.22.14, inversions continue to occur and generate concerns by business folks and government, for opposite reasons, however. Inversions are acquisitions or mergers where a U.S. firm acquires a foreign company and moves overseas in order to take advantage of much lower corporate tax rates.

Our government claims the practice is wrong, characterizing it as taking advantage of a “loophole.” I disagree. The US corporate tax rate is simply too high; it is among the highest in the Western world. The exorbitant tax rate is the cause behind the exodus by American companies to Europe. We ought to make corporate tax rates more reasonable, incenting American companies to stay.

Here are two more recent inversion deals. U.S. drug maker AbbVie will purchase Dublin-based Shire for about $54 billion, one of the largest deals to date involving a U.S. company which creates a holding company in a foreign country with a lower tax rate. For another recent example of this, take a look at Mylan’s acquisition of Abbott Laboratories’ overseas generic-drugs business.

Hedge funds are getting into this business, wagering billions of dollars on companies they believe will benefit from a wave of takeover deals designed to lower taxes for U.S. acquirers. If you do not like this practice, the solution ought to be about modifying our tax code as opposed to “closing a [perceived] loophole”. See my Blog of 7.22.14.

M&A activity is surging. Both deal volume and spending increased in the second quarter 2014 and this is the first time deal volume has increased in consecutive quarters in several years.  This year has been the most active M&A market since the financial collapse.  Over the past quarter, the sectors that saw the largest increases in deal activity include commercial, consumer and technology services. Deals continue to be announced or closed even in August, traditionally one of slowest months for M&A.

Over the last 2 weeks alone, there have been several mega mergers or serious merger discussions among larger companies. The M&A market is heating up. When this happens, there is usually a trickle-down effect to middle and lower middle market companies. Stay tuned. Here are a few of the reported deals:

Dollar Tree will acquire Family Dollar Stores in a cash-and-stock deal that values the discount retailer’s shares about at $74.50/share.

CIT will purchase OneWest in a mega deal which surely cause increased scrutiny by regulators.

Lindt, the Swiss chocolate manufacturer, is attempting to purchase Russell Stover. If the transaction is consummated, Lindt would become USA’s third-biggest chocolate maker, with revenue in excess of $1B.

Italian lottery company Gtech is purchasing International Game Technology, a Las Vegas-based maker of casino equipment, for $4.7 billion in cash and stock.

Reynolds American Inc. agreed to acquire Lorillard Inc. in a cash-and-stock transaction currently valued at $27.4 billion.

The U.K company said it would buy a pack of brands, including Winston, Kool and Salem, from Reynolds American Inc. and Lorillard Inc. for $7.1 billion.

Albemarle will acquire Rockwood Holdings for $6.2 billion in cash and stock.

Algonquin Power is attempting to acquire natural-gas distributor Gas Natural Inc.

We need corp tax reform

July 22, 2014

As my students can attest, I am a broken record when it comes to the United States’ corporate tax rates. Our rates are among the highest in the world. This has caused a proliferation of cross-border mergers. These mergers occur when an American company moves its legal headquarters outside of the US in order to take advantage of  lower corporate tax rates abroad. The result? America loses tens of billions in tax revenue each year. This isn’t a matter of our government closing “loopholes”. American companies with a global presence (e.g., Google) are free to establish their headquarters abroad. Our high tax rates make it virtually impossible for companies to compete in a global marketplace. It is time our government address and solve this issue and keep American companies (and tax revenue) within our border.

A purchase or sale of a business is never complete until the wire clears. A business colleague of mine learned this very difficult lesson a few years back. He was less than 1 hour away from the closing to sell his company and the buyer’s transfer of funds. Just before the buyer’s transfer of funds, he received notice of a preliminary injunction order halting the sale due to claims asserted by a former partner. The buyer got spooked and walked away.

Last month, a similar situation occurred relating to the sale of International Vapor Group (“IVG”), an e-Cigarette (“e-Cig”) and vaporizer company with millions of online revenue and several retail stores. As IVG was in the process of closing the transaction worth in excess of $20 million, a former partner asserted ownership and other interests in IVG and demanded financial compensation relating to the sale. The assertions prevented the transaction. Now, instead of a completed sale, there is litigation.

I do not know the particulars of this dispute and whether IVG could have prevented this from cropping up on the eve of its sale. However, sellers should take heed and, as early as possible in the sales process, resolve all issues which could derail or affect the sale.

Start-ups Increasing

June 24, 2014

Start-ups Increasing

Start-ups are on the increase in 2013. Is this good for our economy? Of course it is. I’m not talking about venture capital funded start-ups. I’m talking about entrepreneurs and small businesses which secure funding from friends and family and angel investors. Many of these businesses succeed in smaller ways (some in bigger ways). These businesses hire multiple employees, create innovation and value. The mainstay of our economy remains small and medium-sized businesses. Now that our economy is turning around, credit markets are loosening, providing freer access to capital, creating fertile ground for start-ups. 

 

 

In the Name of Money?

May 29, 2014

In the Name of Money?

U2 has jumped into the investment fray to support Fender, an iconic brand name and manufacturer of famous guitars. Fender has been backed by Weston (not Western) Presidio, an east coast/west coast investment firm. Bono, in addition to being a brilliant composer of music and performer, is a sophisticated and proven investor. One only has to look at the amount of wealth he generated from his investment in Facebook. Bono has also invested in various funds and has a proven track record of success beyond Facebook. He and his U2 band mate, The Edge, who is new to the investment game, are investing their own dollars into a struggling Fender. I wouldn’t bet against them or Fender.

M&A activity is on the rise. The uptick started last year and has continued in 2014. It took a while, but banks are loosening their purse strings, allowing for a much freer flow of cheap capital to fuel acquisitions. This is great news for buy out firms and other financial buyers.

However, on the strategic buyer side, in addition to the availability of bank debt, companies now have an abundance of their own capital due to the record stock market highs. Is this leading to an over-heated M&A market, unrealistic valuations and to a “bubble”? This article highlights the concern:

http://dealbook.nytimes.com/2014/05/13/the-brewing-m-a-bubble/

https://sites.google.com/site/breadandroseslawrencema/home

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