A demonstration of robotic surgery
The bid, for $30 a share, is an 86% premium to Mako's prior closing price and 10-times projected 2014 revenue. Mako, incidentally, is a not-yet-profitable company that appeared overvalued enough to professional investors that 25% of its shares had been sold short.
MAKO shares in midday trade were up 82% to $29.50. Stryker shares, meanwhile, dipped only around 2% to $69.10, shedding less than half the value of the Mako deal and retaining nearly all the stock’s 27% gain this year through Tuesday.
Not a unique response
Typically, acquirers' shares are reflexively punished upon unveiling a deal, to account for the premium paid, dilution of existing shareholders and risks of making buyouts pay off. But investor equanimity in response to a company making a bold, expensive acquisition is not unique these days.
When Applied Materials Inc. (AMAT) announced Tuesday that it would pay a premium to merge with chip-equipment rival Tokyo Electron in a $10 billion transaction – a rare and aggressive takeover of a Japanese blue chip – AMAT shares jumped more than 9%.
And even shares of Verizon Communications Inc. (VZ) are trading higher than they were immediately after the company disclosed it would spend $130 billion – including a whopping $49 billion in new debt – to buy the 49% of Verizon Wireless owned by Vodafone Plc (VOD).
Clearly, the market is implicitly begging big companies to mobilize their idle cash, raise fresh debt at historically cheap rates and utilize their generously valued shares to buy choice corporate assets. This also suggests the market considers many companies too laden with inert cash or too risk-averse for their own longer-term good.
An M&A revival?
So does this mean the long-anticipated revival of corporate M&A – predicted by market analysts and wished for by bankers – is finally upon us?
This is not yet clear. While the value of global-announced M&A is up some 13% this year, according to financial-data provider Dealogic, that’s off an unusually inactive pace in 2012. The number of deals is actually down, and the Verizon-Vodafone transaction – an inevitable, long-deferred one – accounts for a fair portion of the value increase. Heading into this year, according to Goldman Sachs, M&A volume was running some 20% below where history suggests it should’ve been, given the value of world equity markets.
There have been a few false dawns in the M&A market this year. When private-equity firm 3G joined with Berkshire Hathaway Inc. (BRK-A, BRK-B) to say they were acquiring H.J. Heinz Co. on Valentine’s Day, it was logical to believe it would catalyze a wave of deals given cheap capital, reasonable corporate valuations and lush cash balances.
It hardly went that way. The current generation of CEOs has been tempered by the financial crisis and its hazardous aftershocks, content to use their cash largely to buy back stock and raise dividends – activities the market has, to date, rewarded them for.
Still, as the economic and profit cycles mature, policy risks are perceived to recede and borrowing rates at least prospectively head higher, it makes sense to anticipate a somewhat higher level of deal-making.
Veteran deal banker James Lee, vice chairman of J.P. Morgan Chase & Co. (JPM), Tuesday told the Bloomberg Markets 50 Summit gathering that he expects more “large, prominent transactions” to surface before year-end, as the clock is heard ticking in boardrooms on the availability of ultra-cheap capital. (Of course, Lee also said publicly a year ago that deal flow could pick up after the presidential election.)
Lee seems correct in suggesting the current and coming M&A calendar is likely to look more like the 1980s, when big companies drove the action, rather than the early and mid-2000s, when leverage-buyout firms set the pace. Strategists at Societe Generale this week issued a thick report predicting what it terms a sixth great M&A wave (dating back to the 19th century), driven largely by companies positioning for the continued globalization of business.
Certainly, investors in smaller, M&A-dependent investment banks appear to be betting on such a renaissance. Lazard Ltd. (LAZ) is up more than 25% this year, and Evercore Partners Inc. (EVR) more than 50%. And, in some respects, it would be odd if the current bull market were to carry much higher without a notable pickup in deal activity.
Stock valuations are no longer particularly cheap, on average, with profit margins elevated and the major indexes near all-time highs. And as we approach the Washington budget wrangle, we’ve gone most of the year without a real or threatened crisis. This should both increase CEO confidence and motivate them to “buy growth” by seeking out companies to acquire.
If we don’t soon see the deal flow intensify, it will likely mean corporate animal spirits are as slow to respond to prevailing financial conditions as the public has been slow to get excited over stock investments. In this environment, expect the increasingly busy cohort of board-room-invading activist investors to seek many more new — and bigger — targets.