Markets Buoyant, Merger Activity Picks Up

What may have been the most auspicious deal of late was not the biggest or the most groundbreaking of mergers. It was just one that took a little gumption.

In September, Applied Materials, a California maker of semiconductor manufacturing equipment, agreed to acquire its rival, Tokyo Electron, in a deal valued at more than $9 billion.

As an all-stock, cross-border deal, it was the kind of tricky merger that telegraphed executives’ confidence and an appetite to make even slightly risky deals.

“It was when the light bulb went on,” a senior deal maker said.

Are the animal spirits finally returning to the corporate world?

In the United States, they appear to be. While global deal-making was basically flat for a fourth consecutive year, annual volume in the United States was up 11 percent in 2013 compared with the previous year, according to Thomson Reuters.

Companies from New York to San Francisco announced more than $1 trillion worth of deals during the year, the most since the financial crisis. That led the United States to account for 43 percent of all deals worldwide, the biggest proportion since 2001.

What’s more, activity picked up over the final two quarters, with volumes rising sharply from the first six months of the year.

“There’s a feeling of a more stable backdrop that executives think will be with us for the foreseeable quarters,” said Blair W. Effron, co-founder of Centerview Partners, an independent investment bank. “I didn’t have a sense of that at the end of 2012 or 2011.”

And with markets buoyant thanks to relative stability in Washington and around the globe, as well as moderate growth from corporations, the bankers and lawyers that advise companies on mergers and acquisitions are more optimistic than they have been in years.

“From a macroeconomic perspective, we have a stronger economy, we have Congress behaving more responsibly, and we have all appearances of stability at the Fed,” said Scott A. Barshay, head of the corporate department at Cravath, Swaine & Moore, one of the top law firms on Wall Street. “C.E.O.’s can look forward and say, ‘I don’t see any near-term economic bumps.’ ”

This stability is leading executives and directors to return to the business of plotting transformative deals that might take months or even years to execute, and even longer to pay dividends.

“Boards are thinking about their goals not just tactically in a one-year 2014 increment, but more strategically for the longer term,” Mr. Effron said. “Companies are looking further down the field.”

Centerview worked on three of the biggest deals of the year, advising H. J. Heinz on its $23 billion sale to 3G Capital and Berkshire Hathaway, General Electric on its sale of the remainder of NBCUniversal to Comcast for $16.7 billion, and Silver Lake Partners on its role in the buyout of Dell for $24.9 billion.

Other boutique investment banks like Centerview continued to secure advisory roles on the biggest deals of the year. LionTree Advisors, a small firm focusing on media deals, advised Liberty Global on its $16 billion deal for Virgin Media, while Moelis & Company advised Omnicom on its $35.1 billion merger with Publicis, which was advised by Rothschild.

Even the largest deal of the year â€" Verizon Communication’s $130 billion purchase from Vodafone of the stake in Verizon Wireless it did not already own â€" had upstarts among the big banks like Goldman Sachs and JPMorgan Chase. Both Guggenheim Securities and Paul J. Taubman, the former Morgan Stanley banker who helped strike the original deal, advised Verizon.

Yet the big banks continued to advise on most deals, and collect the most fees. Goldman, followed by JPMorgan, led advisers in deals by volume both in the United States and worldwide last year. The two banks also collected the most fees for their work, earning an estimated $1.5 billion and $1.3 billion for their advisory roles, according to Dealogic.

The Verizon deal with Vodafone, one of the largest transactions ever, had been expected for years. But with interest rates low because of the Federal Reserve’s sustained stimulus program, Verizon was finally compelled to act before rates began creeping up. (That advantage was underscored when Verizon sold a record $49 billion of investment-grade corporate debt at once to help pay for the acquisition.)

“This era of low interest rates has encouraged companies to consolidate and clean up some structural inefficiencies,” said Michael Carr, head of Goldman Sachs’s mergers and acquisitions group in Americas.

Still, while many factors encouraged merger activity, one phenomenon that once drove deals â€" activist investors â€" became something of a depressant. Activists were once feared for their ability to shake up company, spurring it to make deals with competitors or test the market for a sale.

To some degree that was still the case. Activists occasionally prodded smaller companies to sell themselves, and in other cases encouraged big conglomerates to dispose of noncore units. Nelson Peltz, for example, pushed for a big spinoff at DuPont.

“Activism has been a positive influence on some companies, making them more introspective,” said Chris Ventresca, co-head of global mergers and acquisitions at JPMorgan. “Companies are realizing that if they don’t look at what is core and noncore, someone will do it for them.”

But by and large, activists focused more on capital allocation than on deals. Moreover, many advisers said that executives now feared that spending money on a deal rather than returning it to shareholders would invite activist scrutiny.

“Companies that have activists in their stock generally do not do acquisitions,” Mr. Barshay of Cravath said. “The activists are completely focused on returning capital to shareholders.”

Regardless, United States companies forged ahead with deals, and were often rewarded when they did. Another factor that emboldened companies to make more deals is that for the most part, the markets rewarded deals that immediately added to earnings. According to Goldman Sachs, in about two-thirds of the deals in 2013, the buyer’s stock price increased on average more than 5 percent on a sustained basis.

“It’s giving people confidence that despite the scrutiny of activist investors, companies can really add value through M.&A.,” Mr. Carr of Goldman said.

Looking ahead to 2014, deal makers say companies could be prompted to make deals for a number of reasons.

One is that with stock markets riding high, companies will probably feel pressure to demonstrate sustained growth to validate their share prices.

“The pressure is building for companies to justify their trading multiples,” Mr. Ventresca of JPMorgan said. “It will be hard to deliver that organically, so you have to look for inorganic growth.”

Certain sectors could also set off rounds of megadeals.

Last year, many companies in the telecommunications industry made deals. Besides the Verizon and Vodafone megadeal, SoftBank took control of Sprint in a $21.6 billion deal, and T-Mobile and MetroPCS announced a multibillion-dollar reverse merger.

While some telecommunications activity could continue, with Sprint reportedly looking at a bid for T-Mobile, 2014 could have a spate of cable television deals. Charter Communications, backed by John C. Malone’s Liberty Media, is preparing to make an offer for Time Warner Cable. But Comcast, the nation’s largest cable operator, is considering a spoiler bid.

If either deal happens, it could kick off a wave of consolidation of both cable operators and cable networks, which could look to gain negotiating power by increasing their scale.

“All year we’ve had strong equity markets, cheap debt and ho-hum M.&A.,” Mr. Barshay said. “That usually doesn’t happen and it is finally starting to change. We’re seeing it in a spate of recent deals and we’re seeing it in the pipeline.”