something to smile about? - Euromoney Institutional Investor PLC

Global consolidationefforts set to rise»Increased earningsencourage acquisitions»389 deals totalling $21.5billion in tech sector YTDIn a scene akin to the lastdance at a disco witheveryone scrambling to finda partner, corporates can beseen scanning the landscapefor acquisition opportunitieshoping to cherry pickvictims before the M&Aspree really kicks off.Year-to-date more than$350 billion of proposedacquisitions have beenannounced - more thanthree times the amount inthe same period for 2003.Some of this can beaccounted for by deals thathave been moving throughthe investment bankingpipeline for some time andare finally coming to a close,but stock market rallies, lowinterest rates and renewedoptimism in the dealmakingenvironment are allhelping to push corporatesto make M&A decisions.“Companies have beenfocused on their balancesheets and earnings for thelast few years, but now thatearnings are growing againand their internal problemsare fixed, they are looking togrow and the best way togrow and the best way to dothat quickly is throughM&A,” says RichardMorgner, head of mergersand acquisitions atinvestment bankingboutique Chanin CapitalPartners. It seems the boardsof technology and telecomsfirms as well as of financialinstitutions are of the samemind. The tech sector hasseen 389 deals totalling$21.5 billion YTD, while inthe finance sector, therehave been 132 dealstotalling $111.6 billion YTD.TechnologyWithin the tech sector, thesemiconductor industry hasseen a spate of acquisitionssuch as Singapore statecontrolledST Assembly TestServices (Stats) purchase ofUS-based ChipPAC for $1.6billion in February.“The wholesemiconductormanufacturing side of thebusiness is getting to wherethe investments to domanufacturing are so high,you’ve just got to have a bigcompany to play in thegame,” says industryobserver Jim Mulady,publisher of The Final TestReporter, a semiconductorindustry newsletter.Consolidation in thesemiconductormanufacturing industry isnecessary to contain costsand increase efficiency, headds.Acquisitions in thesemiconductor sector arefollowing an increasingtrend towards outsourcingby integrated devicemanufacturers (IDMs) - largechip companies that havetraditionally designed,manufactured, tested andassembled semiconductors -who now need to streamlinetheir operations to helptheir cost competitiveness.A recent report fromMorgan Stanley’s GlobalSemiconductor ResearchTeam says that by 2010, thesemiconductor industry willgrow to $360 billion with34% of the industry drivenby outsourcing revenue.“Streamlining can bedone easily throughoutsourcing and assemblyand testing are good areas tooutsource because theyrequire less disclosure ofproprietary information,”says Chris Hsieh, regionalhead of Asian technologyresearch at ING in Taipei.Outside of thesemiconductor industry,there have been severalother major acquisitions,such as US Internet systemsprovider Juniper Networks’spurchase of US networksecurity provider Netscreenfor $3.6 billion. The dealinvolves 1,404 shares ofstock for each of Netscreen’sshares.Michael Cohen, directorof research for PacificAmerican Securities, saysthe Juniper acquisition is aperfect example of howsome larger tech companiesare willing to use theirshares to do deals. As such,he predicts “there will bemore acquisitions to comesince many tech stockssurged last year.”Financial InstitutionsFollowing the announced$58 billion merger ofJPMorgan Chase andBankOne, and Bank ofAmerica’s acquisition ofFleetBoston Financial for$43 billion, the financialSo begins the consolidationinstitutions sector is rifewith speculation of moreM&A activity to come.In a recent pan-Europeanstudy, Credit Suisse analystssaid that with economiesrecovering, capital buildingup and questions over futureearnings growth “somemanagement teams maynow feel under pressure toturn to acquisitions as a wayof boosting earnings”.Co-CEO of Credit SuisseOswald Grubel has said hesees opportunities foracquisition-led expansion inGermany and MBNA EuropeCEO General Charles Krulakis expecting furtherconsolidation in the creditcard business, following hiscompany’s purchase of thecredit card books of UKbanks Abbey and Alliance &Leicester (A&L).“Over a period of timethere will be banks whoissue credit cards right nowwho say maybe the ideawould be to do somethinglike Abbey and A&L havedone. I think you will seeconsolidation.“The questions regardingEgg [which has been put upfor auction by Prudential]are an example of that,where you have a very nicebusiness that is owned by ashareholder who is sayingmaybe someone else can dothis,” adds Krulak.Meanwhile, BNP ParibasCEO Baudouin Prot says heis “actively searching” foracquisitions to follow thepattern set by the €9 billionof deals done by the banksince the merger of BNP andParibas in 1999. MWcorporatefinancemag.com March 2004 cf 10