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By Marine Cole
Worldwide merger and acquisition activity has increased 22 percent so far this year compared with the same period in 2009, but showed renewed weakness in May.
Global M&A activity amounted to $146 billion this month, the slowest monthly period since August 2009, according to data provided by Thomson Reuters. Worldwide M&A totaled $862.7 billion during the first five months of 2010.
M&A in the industrial sector totaled $71.6 billion so far this year, more than double the activity in the same period last year.
This week, robust companies continued to use cash they've accumulated during the credit crisis for M&A purposes.
In one of the biggest deals, Shell, the largest oil and gas producer in Europe, said it would acquire shale gas assets from East Resources for $4.7 billion in cash. The offer was made to East Resources as well as its private equity holder, Kohlberg, Kravis & Roberts, which invested $350 million for a substantial stake less than a year ago, according to the Wall Street Journal. (More on KKR's latest deals.)
In technology, International Business Machines agreed to acquire Sterling Commerce, a business network company, from AT&T for $1.4 billion in cash. The acquisition is part of a long-term strategy at IBM to double earnings per share in the next five years. IBM has set aside $4 billion a year for M&A, according to the WSJ, adding that analysts expect the tech giant to spend it on smaller acquisitions such as Sterling Commerce. The transaction is the second largest acquisition IBM has made since 2007, behind the $4.3 billion deal for Cognos in January 2008, according to Dealogic.
Meanwhile, the Kraft Foods takeover of Cadbury continues to meet hurdles with UK regulator criticizing Kraft for closing a plant after saying it wouldn't and several senior executives at Cadbury leaving the company.
But the outlook for M&A activity in the US food packaged sector still looks promising as companies try to enhance sales growth, according to a report published this week by Fitch Ratings.
US packaged food companies have reduced leverage recently, which bodes well for further M&A activity. The acquisitions are likely to be in core categories that could lead to expansion or strengthening of geographies, similar to the rationale for the Kraft-Cadbury deal, according to Fitch.
"Emerging markets are attractive for acquisitions or joint ventures because of their faster growth rates and large areas for expansion," said Judi Rossetti, a director at Fitch. "In addition to the desire for faster emerging markets growth, packaged food companies with similar input costs or product categories may consider business combinations to generate cost synergies and bolster margins."
But packaged food companies could load up on debt to complete acquisitions, prompting Fitch to warn in its report that some may have trouble holding on to their investment grade credit ratings. Too, legal liabilities arising from a US crackdown on bribery abroad could complicate emerging market deals.
In the week's Big Dud, the New York Times reported on Friday that Prudential UK said it cannot win enough shareholder support for its proposed acquisition of AIA, the AIG unit that the US Treasury is hoping to unload, for the $35.5 million that the two companies agreed to earlier this year. According to the report, the price will have to come down by at least 15 percent for the transaction to close.
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