When billions of dollars are being spent on Dairy Milk bars and Hulk comics, its clear that the deal-making boom is back with a vengeance.
Kraft Foods Inc.'s $17-billion (U.S.) hostile bid for Cadbury PLC - the world's No. 2 player in candy - and Walt Disney Co.'s $4-billion friendly takeover of Marvel Comics show that after a year on the sidelines, global companies are once again cracking open the coffers to build even larger franchises.
"A year ago, the Kraft deal would not have been possible, because no one had any faith in what the future held. Now, there's an emerging sense of confidence," said the head of investment banking at one Canadian dealer.
Recent months have brought two major changes at most large companies. The first is psychological: CEOs and boards have stopped worrying about survival, and started thinking about expansion.
Through much of 2008 and 2009, the biggest players in mergers and acquisitions were governments, moving to prop up distressed companies with capital injections. Now, corporate players are back on offence. Kraft CEO Irene Rosenfeld, who runs the No. 5 player in candy, is attempting to overtake the market leaders at Mars Inc. when she pitches her offer for Cadbury by explaining: "This proposed combination is about growth."
The second reason M&A is on the upswing is financial: Companies can once again raise the billions of dollars needed to pay for acquisitions. In contrast to the credit crunch that played out over last year, when both debt and equity markets were closed to companies contemplating transactions, stock and bond markets are now open, on attractive terms.
"Blue-chip companies can finance major acquisitions again," said one investment banker whose employer has a role in the Kraft bid. "The corporate bond market is on fire, and that in turn means banks are willing to lend on takeover, because they are confident bridge loans can be repaid with a bond sale."
Add in companies such as Cadbury, with strong brands but a relatively weak stock market valuation, and the stage is set for major transactions. Investment bankers predict that after 12 relatively quiet months, the pace of mergers and acquisitions is set to explode in a number of sectors, including brand-name manufacturers.
"These consumer product deals are all about the balance of power with retailers such as Wal-Mart," said Joseph D'Cruz, a professor at the University of Toronto's Rotman School of Management. He said the same rationale that drove Procter & Gamble Co. to buy Gillette Co. for $57-billion in 2005 is now pushing Kraft to bid for Cadbury. He said: "Kraft is driven by a desire to be the primary supplier to retailers, particularly to the U.K. supermarket chains, which are very powerful, and skilled at using their power."
The same strategic logic is expected to draw rival bids for Cadbury from the likes of competitors such as Nestlé SA and Hershey Co., which would rank well behind the market leaders if Kraft does come out on top.
Kraft is also justifying its cash-and-shares offer for Cadbury by predicting that the combined companies could realize $625-million in annual savings, adding to the bottom line. That explanation draws raised eyebrows from academics.
"There are no real economies of scale here," Mr. D'Cruz argued. "These companies are now so large that you can argue the increased cost of managing their complexity outweighs the savings that can be gained from streamlining production."
Andrew Willis