NEW YORK – The stock market’s big 2006 advance gave a boost to more than investment portfolios: It fueled a frenzied pace of mergers and acquisitions, with hedge funds and private equity shops sending the total value of acquisitions to a staggering $4 trillion.
This set a record for mergers, besting the dot-com boom in 2000, when the value of deals totaled $3.3 trillion, according to tracking firm Dealogic. It gave Wall Street bankers a lot to smile about, especially given the astronomical bonuses doled out at the end of the year.
But the little guy wasn’t exactly left out, either. All the robust acquisition activity gave investors confidence in corporate profits, and has helped send the Dow Jones industrial average to a record 12,000 and beyond.
The deals are expected to continue into 2007.
“It’s hard to have one record-breaking year after another, but even if the number of deals slow, you’ll still see extremely large levels of deal flow in absolute terms,” said Howard Horowitz, director of research for Water Island Capital, which manages the Arbitrage Fund. “Deals are getting bigger and bigger. Cash levels will be comparable to this year, if not above it.”
There were 31,825 deals last year – about 800 more than in 2000, according to Dealogic. Private equity firms contributed to 18.4percent of all the deals in 2006, spending a record $725.3 billion to take companies private.
Participation by these buyout shops has injected the market with a massive amount of liquidity, analysts said. And companies, many fed up with scrutiny from investors and regulators, have been willing to become private companies.
Firms like Kohlberg Kravis Roberts, which engineered the buyout of RJR Nabisco in 1989, are flush with cash to go shopping with. It is said that private equity firms head into the new year with some $2 trillion in buying power.
KKR – along with Bain Capital Partners and the buyout unit of Merrill Lynch – in July secured the biggest deal in history with the acquisition of hospital operator HCA. The deal was valued at $30.6 billion, including the assumption of debt, and set the bar higher.
And bankers worked until the final days of 2006 in pulling off the seventh-largest private equity deal of the year. Apollo Management and Texas Pacific Group secured a $17.1 billion agreement to take Harrah’s Entertainment private.
The big five Wall Street investment banks had record profits in 2006, and their chief financial officers all say there are still plenty of deals to be made.
“There’s still a lot of confidence out there,” said Morgan Stanley CFO David Sidwell after the company reported a full-year profit of $33.86 billion. “You can’t make predictions if 2007 will be able to top 2006, but company executives that we talk to are still very eager to do deals.”
This kind of resolve is a good thing for the stock markets. Investors moved aggressively into equities because companies are turning in double-digit profits, and the strong M&A momentum means chief executives are feeling optimistic.
“All of this consolidation is forcing companies to run a tighter ship, and that’s good for investors and everybody else,” said Ryan Larson, senior equity trader with Voyageur Asset Management.
He believes institutional and retail investors alike might have been caught of guard by the sheer magnitude of activity during the year. But in 2007, they will be prepared to snap up shares in sectors seen ready for consolidation.
