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Big Deals (August 20) Print E-mail
Friday, 20 August 2010

By Marine Cole

August is typically a slow month for mergers and acquisitions activity, but with the BHP Billiton $43.8 billion unsolicited bid for Canada's Potash, this year is different.

This is the largest announced deal of the year, bringing the weekly M&A volume to $89.8 billion, according to data from Thomson Reuters. This is also the largest weekly total in August in four years since total M&A volume reached $97 billion in the week of Aug. 20, 2006.

Just past the halfway point of the month, total volume has reached $197.6 billion this month and could break records for August activity, with the next largest month of August historically in 2006, when total announced worldwide was $260 billion.

BPH announced its bid early in the week, which was rejected by Potash. But as of Friday, BHP said it had begun a roughly $40 billion tender offer for Potash shares, officially going hostile in the pursuit for the Canadian fertilizer giant, according to New York Times reports.

In Europe, however, the M&A market has yet to revive. Acquisitions of UK targets by UK acquirers, for example, total $52.5 billion for the year-to-date 2010, a 36 percent decrease in domestic M&A activity in the UK compared to the same period last year when total value reached $81.6 billion. This is also the lowest year-to-date volume since the same period in 1995. This is despite this week's $7.8 billion acquisition of Aviva Plc - Insurance Business by RSA Insurance Group, one of largest announced M&A deals this week.

In the debt markets, US agency Fannie Mae has made a return, bolstering activity for mortgage-backed securities. Total MBS offerings from Fannie Mae have more than doubled from $39.2 billion for the year-to-date period in 2009 to $101.4 billion in 2010. This is the largest year-to-date value for MBS offerings from the agency since 2003. MBS offerings currently account for 49 percent of all debt issued by Fannie Mae this year, compared with 19 percent of all offerings from the government-sponsored enterprise for the same period in 2009.

But the price of existing mortgage securities from Fannie Mae and Freddie Mac tumbled this week on concern that refinancing will accelerate after the Federal Reserve said it would buy more government notes, according to Bloomberg reports. Mortgage bonds have struggled after climbing to all-time highs last month.

Fannie Mae and Freddie Mac may also force banks to repurchase $175 billion of bad mortgages. Fitch Ratings put a report out this week saying that Bank of America, Citigroup, JPMorgan Chase and Wells Fargo may be on the hook for loans they sold to the two GSEs. They both hold about $355 billion worth of bad mortgages on their balance sheets and as much as $175 billion may be available for repurchase, putting additional pressure on banks.

"Fitch is concerned that a more aggressive request for loan repurchases could potentially expose banks with large mortgage origination operations to future losses that have not been previously incorporated into Fitch's existing exposures, and effectively into current ratings, Bloomberg reported.

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