M&A roundup: the SAP effect
One M&A theory knocking about suggests deal activity will return more quickly after this downturn than it has after previous ones. The idea focuses on the fact that IT systems are far more advanced today than they were in the downturn of the early 1990s. As a result, companies have been able to see where things are going wrong and quickly cut costs. This means cost-cutting options are running out and, to continue delivering growth, issuers will have to acquire competitors.
‘We call it the SAP effect on the world,’ says one London-based fund manager, in reference to the German business software provider. ‘For example, if you have a factory in Brazil, back in the 1990s it might have taken you a month to realize orders were down; now, the finance director knows the very next day. That meant last year we saw very vicious cost cutting.
‘To an extent, a lot of cuts have been completed and there is only so long you can delay things like maintenance capex, like repainting walls and replacing old machinery. So the next stage for companies to deliver earnings growth is through acquiring smaller rivals. By stripping out costs – closing down the head office, for example – you can deliver earnings growth.’
Adding to the conducive environment for deals are record levels of corporate cash. Around the world governments may be staggering under the weight of huge deficits, but in the corporate world things look a lot different. According to Citi, non-financial companies hold around $290 bn more cash than they did in 2007. One way to put this money to use is to go out and buy.
‘Corporate credit has never been better,’ adds the fund manager. ‘Free cash flow as a percentage of GDP is higher at the moment in the UK and the US than it has ever been before. This means you have a big slug of cash-rich companies.’
If the stats don’t yet bear out these trends, they at least show some signs of recovery. In January the year kicked off with a flurry of deals, although the pace slowed toward the end of the month, according to Brenon Daly, financial analyst at the 451 Group.
What’s more, the fourth quarter of 2009 was the best quarter since the third quarter of 2008 for deal activity, according to mergermarket. Q4 figures were also up around 90 percent on the previous quarter, says the data firm.
A few words on Kraft and Cadbury, where the drawn-out takeover is just about wrapped up. It was back in September Kraft made its initial – swiftly rejected – offer for the UK confectioner. Kraft’s chief executive Irene Rosenfeld deserves plaudits for holding her nerve to secure what many believe is a fair price for Cadbury of 840p ($13) plus a 10p dividend.
Had the deal fallen through, though, she would have been in a tricky situation, having sold a lucrative pizza business to rival Nestlé to fund the increased Cadbury offer, a move that riled shareholder Warren Buffet. Ominously for Rosenfeld, the sage of Omaha still thinks it is a ‘bad deal’, and for her the hard work has only just begun as she goes about the integration.
Buffet made his feelings known during an interview with business channel CNBC. Of Rosenfeld he said: ‘I think she is a perfectly decent person; she could be a trustee under my will. I just don’t want her doing this particular deal.’ Faint praise, indeed.