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Aug 31, 2009

M&A focus: Equities rally boosts deals

The Americas and Asia-Pacific regions are leading an M&A recovery with Xstrata on the prowl in the mining sector.

One rally looks set to lead to another: many predict the rise in global equity markets experienced since March will boost M&A activity. Market commentators have been prophesizing a jump in deals for some time; the distressed state of business around the world lends itself to such activity. But a big stumbling block has stood in the way of consolidation: the inability of buyers and sellers to agree a price.

Now, the rally in global markets is making prices look more attractive to sellers – and their shareholders. From a March low of under 3,600 points, the FTSE 100 hit over 4,600 by the start of August. The Dow Jones Industrial Average has also fared well, jumping from below 7,000 points to more than 9,000 over the same period.

As a result, the much-anticipated wave of consolidation may finally arrive. This change in mood is reflected in data from the IntraLinks Deal Flow Indicator, which observes deal flow through the activity on IntraLinks’ M&A virtual datarooms. Deals appear on IntraLinks, a provider of online information exchange solutions, around three months before being made public, giving a taste of future moves in the market.

According to the firm, there was a 10 percent increase in global deal activity between the first and second quarters of 2009, driven mainly by activity in the Americas and Asia-Pacific regions. In the grander scheme of things, activity is still struggling; deal activity was down 28 percent on the second quarter of 2008. But the 10 percent increase marks a big jump compared with previous quarters.

IntraLinks puts the activity down to the gains experienced in equity markets, increased distressed selling of assets and more strategic buying activity. If markets continue to rise, expect this uptick to continue. Many doubt that the rally has real legs, however. Economic data have picked up recently but current optimism could be misplaced with so many out of work and in debt. As a result, the pick-up in deal activity could falter if markets start to slide again.

Among consolidators on the prowl is Xstrata, the mining company, which seeks an $80 bn ‘merger of equals’ with Anglo American. The size of rivals Rio Tinto, BHP Billiton and Vale, not to mention the near tie-up between Rio and BHP earlier this year, has convinced Xstrata that it needs to upsize dramatically, a pursuit that led to a notable bit of IR dueling.

Xstrata had sent a letter to Anglo’s board, asking it to consider a merger between the two mining companies, a proposal swiftly rejected by the target. As a result, in a clear bid to woo Anglo’s shareholders, Xstrata published the letter on its website, ‘which sets out the highly compelling rationale for an all-share merger of equals, in which both sets of shareholders would share equally in the substantial benefits of a combination,’ according to the company.

This led to the odd situation of corporate correspondence marked ‘Strictly private and confidential’ being posted openly on the web. It envisioned a future where only the largest mining companies would be able to generate strong returns for shareholders. As IR magazine went to press, however, Anglo’s shareholders appeared unmoved by the new approach.

Details correct at time of going to press.