Support : eNewsletters : Eye on Innovation : Issue 8, December 2010

IPO, collaboration, acquisition: What's the name of the game?

Deals and more deals—have you read about these?

• Japan shipper NYK to buy 50% of Norwegian Knutsen Offshore Tankers
• Australian OneSteel to acquire Moly-Cop and AltaSteel, producers of grinding media for the mining industry, from Anglo American for a total of $932 million
• Pfizer Inc. to buy a company specializing in pain drugs in a $3.6 billion deal meant to shore up the portfolio of the world's largest drug company
• U.S. drugmaker Johnson & Johnson to buy the remainder it doesn't already own of Leiden, Netherlands-based vaccine manufacturer Crucell NV for $2.4 billion
• Australia's BHP Billiton Ltd. proposed to buy Canada's Potash Corp of Saskatchewan for $43.4 billion in the biggest proposed cross-border acquisition and the biggest deal in the world this year.

Sources: Gale Trade & Industry Database™, Gale PROMT^®, TableBase™/p>

No matter what the industry or where it's located, mergers and acquisitions and joint ventures seem to be gaining speed. In the last two issues of Eye on Innovation, analysis focused on venture capital and R&D. One of the major sticking points for small R&D companies, backed by venture capital, has been their inability to "go public" with an Initial Public Offering (IPO) once the VC money dries up — very different from the good old days of the dot-com bubble when approximately 90% of exits for venture capital-financed companies were through IPOs. So what's the answer? How can struggling small companies continue their projects? How will mature giants expand their products and markets?

Delving into Dialog's business journals, its news sources and market research, this issue of Eye on Innovation explores alternatives to IPOs, identifies some of the acquisition, merger and joint venture giants worldwide, the hottest sectors and forecasts activity for 2011.

What a difference a year makes

Mergers, acquisitions, spin offs, hostile takeovers, leveraged buyouts, stock swaps and more—which one makes most sense for your company? That depends. With healthier businesses, a relatively positive outlook on economies and the need to reach out to new markets and diversify businesses, investment banks could mollify their investors by finding partners or selling off a company; small companies could locate new avenues to expand their businesses and buy assets and mature companies could acquire new assets that match their core strengths either to improve their positions in existing markets or gain access to new ones. A couple of options seem to be grabbing the most attention from investors and businesses, large and small.

Strategic alliances and joint ventures

Rarely does a day pass when the front pages of the world's financial publications don't trumpet the latest corporate alliance. Organizations are now linked with dozens of partners in strategic alliances, such as joint ventures, cross-selling agreements and patent-licensing deals. Joint ventures globally from pharmaceuticals to IT to retail show the trend:

• Pharmaceutical companies Acceleron Pharma Inc. of Cambridge and British drugmaker Shire plc announced a joint venture to develop muscle therapeutics for rare diseases, and Sanofi-Aventis, the fifth largest consumer healthcare company, signed agreements with Minsheng Pharmaceutical Co., Ltd., the largest consumer healthcare segment in China, to form a new consumer healthcare joint venture to focus on vitamin and mineral supplements.
• Technology giants combine business units: Sony and Ericsson combine their mobile-handset units to take on Nokia and Motorola, Spansion merges the flash memory businesses of AMD and Fujitsu, and Renesas Technology forms the $8 billion combination of Hitachi's and Mitsubishi Electric's semiconductor operations. Other successful strategic partnerships or alliances include CISCO/IBM, CISCO/SalesForce.com, SalesForce.com/Dell and ATT/Apple Phone.
• Retail industry conglomerates Kraft Foods and Cadbury, Phillips-Van Heusen and Tommy Hilfiger and Best Buy and RadioShack have created strategic alliances to strengthen already-strong companies.

Sources: Dialog NewsRoom, Dialog Global Reporter, ABI/INFORM^®

Purposes vary from entering new markets, developing new products, or shoring up positions in a sector to competing with another company with similar products.

Is M&A heating up—Mixed signals in 2010

At the beginning of 2010 there was surging merger and acquisition (M&A) growth in regions including Brazil and Mexico. But the overall prognosis for mergers and acquisitions was in the doldrums with the value of global M&A activity on course for another year of decline, dragged down by continued weakness in mature markets like Europe, Japan and the United States. In January deals outside the United States dropped 19% in volume from 2009, but transaction value jumped 49%. Although activity is sliding lower, companies seem to be turning to M&A to create the one-stop shop.

Red hot and off the radar

A flurry of mergers and acquisitions in the later part of this year signals what could be the beginning of the biggest increase in deals since the economy tanked three years ago. In fact, the M&A marketplace in this last quarter has been on fire with many headline deals.

• Nearly $25 billion in M&A deals were announced in November
• Volume of worldwide M&A totaled $211.8 billion, up from $197.6 in October
• Total value of Asia Pacific M&A reached $55.4 billion, the third largest month by value
• Asia Pacific targets currently account for 19% of the worldwide annual M&A volume.

IBM's purchase of data analytics company Netezza, Inc. New Zealand, Hewlett Packard's rebid for 3Par, American manufacturer of systems and software for data storage and information management and its acquisition of Arcsight, a global provider of Enterprise Threat and Risk Management (ETRM) solutions, suggest the M&A growth strategy for these slower growing conglomerates with mature sales forces and strong customer relationships.

Where's the action?

The M&A marketplace, in combination with emerging countries, is red hot! During the first three quarters of 2010, emerging markets accounted for 27.4% of worldwide M&A volume compared to 21% during the comparable period in 2009, and mergers and acquisitions involving companies located in these markets skyrocketed by 62.9% over 2009, totaling $480.7 billion.

The Materials sector has been quite active so far this year with significant acquisitions from China, Thailand and Canada. Other top sectors for M&A worldwide include energy and power, telecommunications, financials and industrials. Targeting natural resources and materials from mining and metallurgy to electricity-distribution networks to coal and food products, companies like Agrium Inc. (Canada) acquired AWB Limited, a Hong Kong consortium bought Electricité de France's U.K. electricity-distribution networks, Thailand's Banpu, Asia's leading coal and coal energy provider, bought Australia Centennial Coal for $2.5 billion and Thai Union Frozen acquired French canned seafood business MWBrands.

Major geographic areas are seeing changes in M&A activity. Some highlights illustrate the expansion of M&A.

Source: Investext

The Americas
U.S. corporations have doubled M&A expenditures in markets such as India and Russia. In the Americas, Brazil and Canada have surfaced as sites for acquisitions.

• Abbott Laboratories' completed a $3.7 billion deal in May to buy the branded generic drugs operations of India's Piramal Healthcare Ltd.
• Coca-Cola Company bought Nidan, Russia's fourth-largest juice maker.
• Pepsi acquired Wimm-Bill-Dann, in one of the biggest foreign investments in Russia outside the energy sector.
• Worldwide cross-border deals, not including the European Union or United States borders, also increased totaling $843.2 billion so far this year, up 54 percent from 2009.
• Google has racked up 25 acquisitions over the past year.
• BHP Billiton has proposed to acquire Canadian company Potash Corp.

Europe
Although Europe struggled economically in 2009 as a result of the recession, 2010 shows European M&A gaining momentum with growth of just under 24% over 2009.

• Cross border M&A, particularly prevalent into and out of Europe this year, accounted for 41.2% of total global deal volume over the nine-month period, up from 26.1% for the same period last year.
• The European automotive sector is performing impressively, driven by cost savings from the past two to three years and business in China.

Source: Investext

Asia-Pacific
A binge of mergers and acquisitions is being fueled by the global currency war, which has increased the value of emerging market currencies. In these markets, China leads the charge with Indonesia and Taiwan close behind. Hong Kong and Singapore are also players.

• M&A activity in deals across international borders surged during the first nine months of 2010, totaling $723 billion and accounting for 41.2% of overall M&A volume, compared to 26.1% last year. The trend seems likely to continue.
• China and India are at the center of a bidding war for global resources, especially energy and metals, boosting cross-border deals.
• Three large transactions involved China and India buying into energy properties in South America.
• India's M&A is increasing, as well as the acquisition of Indian companies by international companies.
• China's mining and metals deals are up 53 percent.
• Malaysia is the fastest growing market for M&A in the Asia-Pacific region as acquisitions of Malaysian companies almost tripled so far this year.
• A consortium of 13 investors acquired oil and gas company Japan Nuclear Fuel Limited, the largest oil and gas merger and acquisition transaction on record in Japan. Overall M&A, activity is up 14% so far this year in Japan.
• With China leading the way, followed by Korea, Asian National Oil Companies (NOCs) have become players in the global oil and gas industry expanding their presence in oil-rich countries like Venezuela, Brazil and Russia—the goal to secure future energy needs.

Sources: Dialog Global Reporter, marketresearch.com

What's next for M&A?

Will we see anything like the mega-mergers from 2009 when Pfizer took over Wyeth, Roche bought the remaining shares in Genentech, and Merck & Co. acquired Schering-Plough? Seems possible and here's why.

With low prices for takeover target companies, historically high cash balances and easier credit terms, the atmosphere for deals in 2011 is as positive as it's been since the credit crisis sent the economy, and M&A activity, into a tumble. Companies are expected to focus on expanding their core businesses to increase market share, looking at M&A as part of their competitive strategy.

Look for the importance of consolidation and alliances to increase, as companies adapt to changing conditions within industries and markets. Companies will need to turn to M&A to consolidate their businesses and to diversify into other developmental areas. Emerging markets should lead the M&A growth in 2011, just as they did in 2010:

• Emerging Asian markets are ripe for M&A deals in 2011, with 43% targeting markets in the Americas. By comparison, only 30% are looking at Western Europe and only 18% find Eastern Europe and Russia attractive.
• Asian companies have the necessary cash to get deals done. The total cash reserves of Asian companies reached $231.6 billion in mid-2010. Corporations in the Asian region (excluding Australia and Japan) have seen their total cash balance — including cash, cash equivalents, deposits and short-term investments — grow by almost 60% since the end of 2008.
• Global M&A activity is expected to increase 36% next year to $3.04 trillion, driven by a big pick-up in deals in the real estate and financial services industries.

Where will important M&A activities be most likely to occur during the remainder of this decade? What will their prospects be? Which companies will acquire, merge, consolidate or partner and which companies are most likely to be targets. Most important, which deals will leave companies well placed to consolidate operations and expand revenues and where will intellectual property fit into the strategy? Companies worldwide will be watching carefully for answers to these questions.

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