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The Buyside
Are Blockbuster Mergers Back?

The Heinz, Office Max and Dell deals may set the tone for M&A in 2013

With Berkshire Hathaway Inc. and 3G Capital's $23 billion purchase of H.J. Heinz Co. on Feb. 14, dealmakers wondered whether the pre-economic-downturn multi-billion dollar transactions they remembered so fondly had finally returned. But the question remains: Will that deal and the others that popped up around that time set the tone for M&A in 2013? If not, is the blockbuster merger poised to return at all?

On Feb. 20, Office Depot (NYSE: ODP) and OfficeMax (NYSE: OMX) announced a $1.2 billion merger that would combine the second- and third-biggest office supply retailers. The agreement was unveiled less than a week after American Airlines (OTCQB: AAMRQ) and U.S. Airways (NYSE: LCC) voted for an $11 billion deal to combine the two carriers - retaining the name American Airlines - and creating the largest airline in the world. Then there was Comcast Corp. (Nasdaq: CMCSA) purchase of General Electric Co.'s (NYSE: GE) 49 percent stake in NBCUniversal for $16.7 billion on Feb. 12, and Silver Lake Partners taking Dell Inc. (Nasdaq: DELL) private for $24.4 billion.

"I thought for three years in a row that we would have a big up-year in M&A and I haven't been right yet," says Paul Hastings partner Barry Brooks. "But I really believe it this time."

The reasons why we're seeing these large deals haven't changed: pent-up demand for deals from all types of entities, available equity and an uptick in shareholder activism. Also, aside from the Justice Department's suing Anheuser-Busch InBev (NYSE: BUD) over its $20.1 billion proposed takeover of Grupo Modelo (BMV: GMODELOC)-unless it sold the U.S. rights to Corona and other assets to Constellation Brands Inc. (NYSE: STZ) for $2.9 billion-we haven't seen the kind of antitrust activism that by itself might slow down activity.

"Corporations and sponsors have cash built up and they've been looking to grow," Brooks adds.

"Am I ready to declare victory? No," says Spencer Klein, co-head of Morrison & Foerster's global M&A practice. "They're four noteworthy deals, but I'm not sure we can say that the large public M&A deal is back. They have their own unique characteristics and that may not suggest something broad across the market."

That doesn't necessarily mean large deals won't take place in 2013, Klein explains. These days, banks are more open to large-scale acquisition financing. Also, the cash piles that companies have been collecting have continued to grow to the point where even the largest companies are criticized for not putting it to work, he adds.

Another factor not to be overlooked is an increase in hedge fund activism, Klein adds. "That will likely put more pressure on companies to reorganize."


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