Tech M&A Rises to 2000 Levels

As reported in the NYTimes DealBook, merger mania that gripped the world during the dot com bubble seems to be making a comeback. Fueled by Facebook's two big acquisitions, the dollar volume of tech deals is up 90 percent worldwide, to $65.2 billion, year over year, according to Thomson Reuters data. This is the highest it has been since the year 2000.  The ten biggest tech deals of the year all involve acquisitions of American companies, the biggest of which has been the purchase of WhatsApp for $19 billion. The WhatsApp acquisition is the fifth largest tech deal ever, according to Thomson Reuters. Technology is hot right now, and looks to be picking up steam. We've received more inquiries from technology companies this year than we typically do. Not everyone is excited about the tech boom, however. Castlight recently went public in an offering that defied traditional valuation metrics; the company's valuation soared to more than $3 billion on 2013 revenues of only $13 million. Yahoo! finance called it the worst IPO of the century. So, where does this leave the rest of the market? As with any bubble, everything is rosey until something pops. With the momentum tech has built so far this year, it wouldn't surprise us to see more large deals over the next 9 months of the year. However, if valuations continue to defy historical measurements and reality checks, watch out - the last time companies without profits were going public at incredible multiples (dot com bubble), the market correction was harsh and swift. Read the original article from NY Times DealBook here.

Nokia-Microsoft Deal Delayed

As reported by CNBC, Nokia has been forced to delay the completion of the sale of its phone business to Microsoft due to continued regulatory hurtles in Asia. Nokia stated that they expect the deal to close in April 2014, while previous guidance had stated an expected Q1 2014 close. In September 2013, Microsoft agreed to buy Nokia's phone business for $7.2 billion. However, after six months the deal has not closed, fueling concerns about whether the merger will ever come to fruition. Analysts believe the group may be forced to offer further concessions to Asian regulatory authorities, despite receiving approvals from both the European Commision and US Dept of Justice. Most likely, given the clout of these two companies, the deal will be pushed through and necessary changes made to satisfy all regulatory requirements. Read the entire article here.

KC Based Compass Minerals Makes $85 Million Acquisition

As reported in the Kansas City Business Journal, and as a way to boost its fertilizer business, Compass purchased Wolf Trax, Inc. of Winnepeg, MB, in an all cash deal for $85 million. Wolf Trax is a producer of micronutrients that are crucial in the coating process for dry fertilizer. The coating creates an efficient way to deliver nutrients such as boron and zinc. The purchase price would represent a 4.8x multiple on 2013 revenues. “Wolf Trax brand products are well recognized by fertilizer customers for the differentiated technology they bring to the application of micronutrients. This acquisition will position us for future growth with new products that serve a greater diversity of crops and geographies in a fast growing segment of the plant nutrition market," Compass CEO Fran Malecha said in a release. Read the entire article from the KCBJ here.

E-commerce Competition Intensifies: Megadeal between Google and eBay on the Horizon?

As reported by the San Jose Mercury News, Carl Icahn is at it again. One of the world's most active investors, Icahn is pressuring eBay to spin off its PayPal segment in a move that is intended to unlock value for current eBay shareholders. However, one analyst from Baird Equity Research seems to have a different idea, which he revealed in an investment note released on Monday. Baird analyst Colin Sebastian recently wrote that a merger could be "a possible 'best of both worlds' opportunity" that would accomplish Icahn's goals while allowing Google to shore up a struggling division. He continued to explain that, "we believe acquiring eBay/PayPal would be one way for Google to secure quickly a strong leadership position in commerce and payments, and likewise, could represent a better strategic option than alternatives proposed for eBay," The deal would certainly create a giant in the e-commerce space, with eBay potentially adding $75 billion to Google's already mammoth $400+ billion capitalization. Read the entire article here.

Larger Players Squeeze Mid Market PE Firms

As reported in the Wall Street Journal, it is a difficult time to be a mid-market private-equity firm. Larger competitors, a seller's market and high valuations are combining to create a difficult atmosphere for smaller firms. “We have been getting blown out of the water on bids. Everything is going to auction, that wasn’t the case 10, even five years ago.” said Stratton Heath, partner at Oak Hill Capital Partners, this past Friday. Traditionally, PE firms could come in and make a bid that was persuasive enough for a company to not need to consider an auction process, but sellers are becoming more and more selective.  This also could lead to buyer's remorse; if you're paying top dollar to win a bidding war for a middle market firm, you'd better be right. Read the entire article here.

Middle Market M&A: Ready to Increase?

Fox business reports that mid-sized businesses are poised to grow this year according to data compiled by the National Center for the Middle Market.  The middle market M&A conditions index climbed to 57.9. Any reading over 50 indicates an expansion in M&A business. As reported in CCCA's February Middle Market M&A Report, deal makers reported a spike in early stage deal flow, which also bodes well for mid-market M&A activity. Read the entire article here.

Buffett Hints at More Mega Deals, Admits Failures

Warren Buffett's annual letters to Berkshire shareholders are somewhat legendary in the investing world. He leverages quaint anecdotes to simplify an amazing wealth of knowledge about fundamental investing in a way that is easy to consume for the average investor. This year, Buffett covered a variety of topics, but two key points included hinting at additional mega deals and admitting a misstep in the energy sector. As reported in DealBook and stated by Buffett in the letter, in order to keep growing at a consistent pace, Berkshire will need to consistently make large, successful investments. Last year, Berkshire did just that with Heinz and NV Energy. Buffett said in the letter that, “with the Heinz purchase... we created a partnership template that may be used by Berkshire in future acquisitions of size.” This most likely referred to a structure where Mr. Buffett partnered on the massive acquisition with 3G Capital, an investment firm led by Mr. Buffett’s good friend Jorge Paulo Lemann.  Additionally, Berkshire’s energy subsidiary, MidAmerican Energy, bought NV Energy for $5.6 billion last year and most expect acquisitions for MidAmerican to continue. A strong stock market and improving earnings combined to help Berkshire reach record profits of $19.5 billion in 2013, which represents a 32% increase on 2012.  However, all was not rosy for the Omaha Oracle, as he admitted in the letter that Berkshire had taken an $873 million loss on the $2 billion in debt that had been provided to Texas energy company Energy Future Holdings. Mr. Buffett said in the letter that he anticipated the company would go bankrupt this year unless natural gas prices rose contrary to energy market expectations.  In typical Buffett fashion, he acknowledged that he had not consulted his longtime investment partner, Charles T. Munger, before taking on the debt and said in the letter, “Next time I’ll call Charlie." Read the Annual Letter to Berkshire Hathaway shareholders here.

Blackrock: Political Polarization Creating Lack of Consumer Confidence

Pretty regularly here at the CC Capital Advisors blog, we ask the question: "Why have the markets failed to rebound as fundamentals improve, equity markets rally and an abundance of capital sits idle in a low income environment?" As we wrote previously, healthcare had a tough time in 2013 due to the Affordable Care Act casting a shadow of uncertainty over the market. Russ Koesterich, Chief Investment Strategist at Blackrock recently released a paper that postulates that political uncertainty extends beyond healthcare to tax code, regulatory issues and more. Russ explains that the budget deal has removed the risk of another government shutdown, but continued uncertainty about the ACA and partisan gridlock are making consumers and businesses alike uneasy. According to the figure below, party polarization is at its worst point in fifty years. This graph measures the difference in voting patterns between the Democrat and Republican members of Congress. As you can see, the gap is widening, not narrowing.   So, what does this mean for the wider deal market? First, the uncertainty of the political situation is most likely impacting more than just the health care industry. When a government is unable to govern properly, there is a resulting lack of confidence in that market. This is generally seen in emerging markets, where a sovereign government may make investment difficult or risky, but can also take place in developed countries. Secondly, it will be interesting to see just how good the fundamentals and market opportunities need to be to overcome this lack of faith in the political system. At some point, one would expect deal makers to take advantage of opportunities even if they lack faith in the broader political situation; this will only happen when the reward outweighs the associated risk. Finally, Russ concludes that if there are any sort of "surprises" of the positive sort from Washington, we could see pent up deal demand released into the market place. Of course, that would require a miracle in the form of Congress getting their act together. Read the entire report from Blackrock here.

Facebook to Acquire WhatsApp for $19 Billion

February 20, 2014 11:58 by Clayton Reeves in M&A, Technology  //  Tags: , , , , , , ,   //   Comments (0)
In the biggest internet deal since Time Warner / AOL deal in 2001, Facebook has agreed to acquire WhatsApp for $19 billion. The first thing to notice about this deal is the price.  When Facebook paid $1 billion for Instagram, many thought it was too large of a price tag for the mobile photo app. However, WhatsApp is a much larger fish with a striking growth profile. WhatsApp is a messaging service that eschews typical ad-based revenue business models for a simple, fast, easy to use messaging interface. The app has been successful because it is best in class and does not track user data or spy on users. According to Jim Goetz of Sequoia Capital, WhatsApp's only venture sponsor, “It’s a decidedly contrarian approach shaped by Jan’s experience growing up in a communist country with a secret police. Jan’s childhood made him appreciate communication that was not bugged or taped.” As reported by CNN, WhatsApp has more than 450 million users (more than Twitter) and is adding a million users a day. Facebook CEO Mark Zuckerberg recently said, "No one in the history of the world has done anything like that." WhatsApp is also the most popular messaging app for smartphones, according to OnDevice Research. Unique to this deal is the fact that WhatsApp will still refuse to use advertisements, so Facebook's typical monetization strategy will not apply. It will be interesting to see how the business combination plays out, and whether WhatsApp will truly be able to resist monetizing their hundreds of millions of users with advertisements or data collection. 

Actavis to Acquire Forest Laboratories for $25 Billion

Today, Actavis announced that they have entered into a definitive agreement to acquire Forest Laboratories. Forest is based in New York, NY, but has Midwest operations in Earth City, MO. The purchase price of $25 billion represents a 25% premium over Forest's stock price. The merger is expected to generate double digit accretion in 2015 and 2016, with approximately $1 billion in synergies to be realized within the first three years. If successfully completed, the merger would combine a generic juggernaut in Actavis with a leading name brand producer in Forest. If the transaction closes, the combined entity would have projected revenues of more than $15 billion in 2015, with strong free cash flows in excess of $4 billion. As 2014 rolls on, several interesting deals are coming to light. The Actavis-Forest merger announcement comes on the heels of a potential business combination of Comcast and Time Warner, which is estimated at ~$45 billion in value. Hopefully, these large deals will spur the lower middle and middle markets to follow suit, although the glut of megadeals in 2013 did not seem to have that impact. Read the full press release from Actavis here.

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