By Michael Erman
NEW YORK, May 6 (Reuters) - Investors are rewarding companies of late for making strategic deals, but the reaction could be over-exuberance that overlooks the risks involved.
Traditionally, an acquirer's stock can be expected to fall after it announces a major acquisition. But in half of the top 20 deals this year, the buyer's stock was rewarded in the first day of trading after the announcements.
Earlier this week, for instance, ConAgra Foods Inc shares hit their highest level in more than a year after the maker of products such as Slim Jim meat snacks and Healthy Choice meals made an unsolicited $4.9 billion bid for rival Ralcorp Holdings Inc.
Deals have also become more expensive. Acquirers have paid roughly 13.8 times trailing earnings before interest, taxes, depreciation and amortization on average in 2011, the highest that measure has been since 2007.
'There may be an over-exuberance on the part of the market when some of these deals are announced,' said Morningstar analyst R. J. Hottovy. 'There's a pretty mixed track record -- especially on the strategic acquisition side -- on how well these companies are integrated.
'If they are successfully integrated, it typically takes a lot longer than the company has laid out in their outlook. Right now, there doesn't seem to be much skepticism over some of these deals,' he added.
It does help that the deals have been announced in a bull market. Since the beginning of the year, the Standard & Poors' 500 index is up around 6.5 percent, while the Dow Jones Industrial average has risen 9 percent.
Low interest rates and reduced cost of capital for strategic buyers have also made it easier for companies to launch deals they can tout as adding to their bottom line, said one arbitrageur.
'When a company is sitting on a lot of cash or in a strong capital position, any cash deal can be accretive to earnings,' said the arbitrageur, who spoke on the condition of anonymity. 'People are probably overpaying and giving everyone too much credit.'
He said ConAgra shares traded up, even though the company might have to launch a hostile bid to grab Ralcorp -- an unpredictable process that could take as long as a year to complete.
Exelon Corp shares also traded up following the power company's announcement it agreed to buy rival Constellation Energy Group Inc, in spite of the fact utility deals face significant regulatory hurdles and are substantially harder than other corporate deals to complete.
DEALS ON THE RISE
Mergers and acquisitions have already been on the rise this year. There have been around $1.08 trillion in deals announced worldwide so far this year, up more than 50 percent from the same period last year, according to Thomson Reuters Deals Intelligence.
U.S. deal activity is up around 87 percent, with $474.9 billion in deals announced so far this year.
The receptivity of investors to strategic deals could continue to feed into that trend. Investment bankers say the enthusiasm about strategic deals makes it easier to convince boards to do acquisitions.
'Part of what our clients expect us to do is give our perspectives on where markets are, what investor sentiment is,' said Nicholas Amos, who is in charge of mergers & acquisitions for the Americas at Standard Chartered.
'As part of our characterization of market environment, we absolutely make note of the market's reaction to other deals. But I don't think we draw a bright line from that to say: 'Ergo, we think the market is going to love whatever deal you bring forward.'
But Amos does not believe investors are being foolish by buying into companies that are acquiring growth.
'In a low fixed-income return environment, low interest rate environment like we have today, the opportunity cost of having excess liquidity is pretty high,' he added.
(Reporting by Michael Erman; editing by Andre Grenon) Keywords: DEALTALK/OVEREXUBERANCE (Reuters Messaging: michael.erman.reuters.com@reuters.net; +1 646 223 6021) COPYRIGHT Copyright Thomson Reuters 2011. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, May 6 (Reuters) - Investors are rewarding companies of late for making strategic deals, but the reaction could be over-exuberance that overlooks the risks involved.
Traditionally, an acquirer's stock can be expected to fall after it announces a major acquisition. But in half of the top 20 deals this year, the buyer's stock was rewarded in the first day of trading after the announcements.
Earlier this week, for instance, ConAgra Foods Inc shares hit their highest level in more than a year after the maker of products such as Slim Jim meat snacks and Healthy Choice meals made an unsolicited $4.9 billion bid for rival Ralcorp Holdings Inc.
Deals have also become more expensive. Acquirers have paid roughly 13.8 times trailing earnings before interest, taxes, depreciation and amortization on average in 2011, the highest that measure has been since 2007.
'There may be an over-exuberance on the part of the market when some of these deals are announced,' said Morningstar analyst R. J. Hottovy. 'There's a pretty mixed track record -- especially on the strategic acquisition side -- on how well these companies are integrated.
'If they are successfully integrated, it typically takes a lot longer than the company has laid out in their outlook. Right now, there doesn't seem to be much skepticism over some of these deals,' he added.
It does help that the deals have been announced in a bull market. Since the beginning of the year, the Standard & Poors' 500 index is up around 6.5 percent, while the Dow Jones Industrial average has risen 9 percent.
Low interest rates and reduced cost of capital for strategic buyers have also made it easier for companies to launch deals they can tout as adding to their bottom line, said one arbitrageur.
'When a company is sitting on a lot of cash or in a strong capital position, any cash deal can be accretive to earnings,' said the arbitrageur, who spoke on the condition of anonymity. 'People are probably overpaying and giving everyone too much credit.'
He said ConAgra shares traded up, even though the company might have to launch a hostile bid to grab Ralcorp -- an unpredictable process that could take as long as a year to complete.
Exelon Corp shares also traded up following the power company's announcement it agreed to buy rival Constellation Energy Group Inc, in spite of the fact utility deals face significant regulatory hurdles and are substantially harder than other corporate deals to complete.
DEALS ON THE RISE
Mergers and acquisitions have already been on the rise this year. There have been around $1.08 trillion in deals announced worldwide so far this year, up more than 50 percent from the same period last year, according to Thomson Reuters Deals Intelligence.
U.S. deal activity is up around 87 percent, with $474.9 billion in deals announced so far this year.
The receptivity of investors to strategic deals could continue to feed into that trend. Investment bankers say the enthusiasm about strategic deals makes it easier to convince boards to do acquisitions.
'Part of what our clients expect us to do is give our perspectives on where markets are, what investor sentiment is,' said Nicholas Amos, who is in charge of mergers & acquisitions for the Americas at Standard Chartered.
'As part of our characterization of market environment, we absolutely make note of the market's reaction to other deals. But I don't think we draw a bright line from that to say: 'Ergo, we think the market is going to love whatever deal you bring forward.'
But Amos does not believe investors are being foolish by buying into companies that are acquiring growth.
'In a low fixed-income return environment, low interest rate environment like we have today, the opportunity cost of having excess liquidity is pretty high,' he added.
(Reporting by Michael Erman; editing by Andre Grenon) Keywords: DEALTALK/OVEREXUBERANCE (Reuters Messaging: michael.erman.reuters.com@reuters.net; +1 646 223 6021) COPYRIGHT Copyright Thomson Reuters 2011. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.