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January 14, 2011 5:31 PM

Dealmaker Confidence High as M&A Starts Off New Year with a Bang

Posted by Tom Huddleston Jr.

Shortly after the champagne corks stopped popping, the M&A market started to take off, with a blast of new large deals announced globally.

The Financial Times reported on Monday that, during the first ten days of 2011, combined deal volume totaled $83 billion, up from $67 billion last year. Deal lawyers see this as an example of rising confidence among companies representing a wide array of industry sectors, as well as a reflection of a surplus of cash on the balance sheet.

"[Everyone] looks and says that the improved financing markets and the large accumulation of cash by the large strategics is certainly a factor," says Allison Schneirov, an M&A partner at Skadden, Arps, Slate, Meagher & Flom.

U.S. companies are reported to have roughly $1 trillion in cash on their balance sheets; many are expected to face shareholder pressure to put that cash to use. All that, say deals lawyers and analysts, adds up to what could be the biggest year for M&A since 2007.

The second week of January kicked off with a bang, as four deals valued at more than $30 billion were announced between Sunday, January 9, and Monday morning, January 10; The New York Times reported that dealmakers considered January 10 the first "merger Monday" of 2011.

Easily the biggest announced deal in that period was the $13.7 billion merger--with an additional $12 billion in debt--of Duke Energy Corporation and Progress Energy Inc., creating the U.S.'s largest utility. Also announced: DuPont agreed to pay $5.8 billion for the Danish enzyme and specialty food products company Danisco A/S, California-based iGATE Corporation announced it would pony up $1.2 billion for fellow technology and business outsourcer Mumbai-based Patni Computer Systems Ltd., and Hugh Hefner said he planned to take Playboy Enterprises private for $207 million.

The current boom began just before the holidays, with the last major "merger Monday" coming on December 13, the NYT said, when $35 billion in deals were announced. Such strong showings at the close of 2010 might have heightened the confidence of other dealmakers that the time is ripe for major transactions in the public markets.

At the end of 2010, "you started to see the return of leveraged lending in connection with large buyouts, so that is an encouraging sign for the M&A markets," says George "Gar" Bason, Jr., global head of Davis Polk & Wardwell's M&A practice.

Schneirov agrees that a strong finish to 2010, coupled with increasing financial sponsor activity, has bolstered market confidence. As the year moves forward, she says, look for that confidence to result in more private equity buyers getting into the M&A mix, as well as increased cross-border activity in emerging markets.

Neither Bason nor Schneirov expect the megadeals of the prerecession years to return en masse in the near term. "I think people that I speak to expect fewer megadeals--and, by megadeals, I mean over $10 billion--and still more strategic acquisitions," Schneirov says. (In other words, companies with money to burn will likely favor long-term investments over making a splash.)

And it remains to be seen whether or not the boards at most companies considering strategic combinations have regained confidence in the economy to the point that they feel comfortable pulling the trigger on deals involving a large expenditure of capital without a compelling economic case.

Schneirov points to the fact that expectations were also high going into 2010, but a full return to M&A boom-year levels never quite materialized. "Confidence is such an important driver of M&A activity in general that the lights could get turned off at this party in a hurry if you have a flare-up in the debt crisis in Europe, or some other similar macro-issue that spells trouble for the economy," she says.

For the time being, though, there is reason to be optimistic. FT reported that Genzyme Corporation is working on an agreement with Sanofi-Aventis following the extension of the $18.5 billion hostile offer that was originally put forth by Sanofi over the summer. (Friday, Sanofi upped that offer from $69 per share to roughly $76 per share.) And, the NYT noted that the media company Nielsen Media Research, Inc., is poised for a major sponsor-backed IPO.

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