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2013 already showing ripe conditions for M&A rebound

2013 is already showing signs of being an extremely active year for M&A activity, with a number of big deals recently announced and some even prompting the occurrence of a rare event on the modern M&A landscape – the bidding war.

The recent dealings around the offer by Michael Dell and a private investment firm to buy his eponymous computer company from public ownership back into private ownership has captivated the M&A world on a number of fronts, for the effects it could have on general trends.

The offer made by Michael Dell was for a heavily-leveraged $24 billion, amounting to $13.65 per share and providing a 25 per cent gain for the share owners. Two of the biggest investors in the company have said that his offer undervalues the company and insiders have speculated that a bidding war could be prompted by these differing opinions.

RJ Hottovy, a top equity analyst at business research firm, Morningstar, said that the fact that much of bid was funded by borrowed money showed that large leveraged buyouts could soon start making a comeback, after they all but died out when the recession struck. Hottovy told the Associated Press, "We're finally dusting off the cobwebs. It shows that banks are willing to take risks."

Since November 2012, around a dozen significant deals – worth $3 billion or more – have been struck by US companies, spanning fields of industry including mining, food, technology and airlines. Chief executives had been nervous about striking deals, for fear that they would be unable to count on the economy to help raise profits and absorb merger costs. Of the deals carried out since November, however, the stocks of the acquired companies have risen by 20 per cent – or more – from where they were trading prior to the buyout deals, indicating to chief executives that their fears could be dispelled.

Research carried out by business data provider, Dealogic, has shown that the value of the deals that have taken place or been announced so far this year hearken back to levels not seen since 2007, since the global economic downturn took hold.

Some $219 billion worth of deals have been announced so far, a figure that stands at more than double the figure registered at the same time in 2012. It is also slightly above the figure registered for the same time in 2007 – which subsequently turned into a record year for deal values, topping a total of $1.6 trillion. The research has also found that initial public offerings of stocks have raised the most cash in two decades, with professional investors borrowing more and more to finance their trades, as they are not as afraid of losing money as they had been previously.

Hottovy said that conditions do seem ripe for many more deals to take place over the course of the year. With interest rates reaching close to record lows, borrowing money has scarcely been cheaper and many companies, who were cautious with their spending while the economic downturn was at its worst, can now pay for M&A ventures out of their own funding. Indeed companies registered on the Standard and Poor's 500 index have 66 per cent more cash on their books than five years ago, amounting to more than $1 trillion.

Hottovy said that while conditions for M&A currently look promising, investors must not get ahead of themselves and must remain aware of the still precarious state of global finances. Using last year as an example, he said that a flood of M&A deals caused huge optimism at the beginning of the year, only to almost dry up completely when the European debt crisis foisted necessary caution on international economic conditions. He warned, “We thought we were back but then Europe put a halt to all that.”

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