Andrew Liveris must have known he'd be asked about the premium, but he still sounded a little impatient when he was. The Dow Chemical Co. CEO was speaking to analysts about his company's acquisition of Rohm and Haas Co. for $15.3 billion in cash, a 74% premium to the Rohm and Haas stock price on July 9, the day before the deal was announced. He responded that a one-day premium is a "fascinating topic," but not the reason that a deal happens or doesn't happen. "As you know, we have been carefully evaluating the marketplace for years and we believe that Rohm and Haas is our ideal match," Liveris explained. "There aren't many jewels out there. This is one of them. The fact that it became available matched Dow's strategy perfectly."
Value investor Warren Buffett, for one, found the argument persuasive. His Berkshire Hathaway Inc. bought $3 billion worth of Dow convertible preferred securities to help fund the deal. And it reflects a kind of transaction that once again dominates M&A news. InBev SA's skillful capture of Anheuser-Busch Cos., the joint-venture discussions that turned into Hewlett-Packard Co.'s acquisition of Electronic Data Systems Corp., Mars Inc.'s politically deft purchase of Wm. Wrigley Jr. Co. and Verizon Wireless' shrewd move for Alltel Corp. are among the high-profile examples in the second quarter of this year.
It's now routine to call these kinds of deals strategic, as opposed to the financial deals executed by buyout shops. A clear storyline has developed about the two: For a while, abundant liquidity enabled the financial buyers to set the tone in the market, though they never accounted for more than a third of all deals. The credit crunch has changed that, sidelining the PE firms even as corporate buyers still manage to get deals done. Research firm Dealogic reports that while overall global deal volume is down 28% for the first seven months of 2008 versus the same period last year, strategic activity is off only 15% by dollar volume and is actually up 6% by number of transactions. Buyouts, by contrast, are off 74% and 25% by the same measures.
This sharp divergence is worth thinking about. M&A is famously cyclical, but has there ever been a downturn like this, where so many companies are willing and able to forge ahead with major initiatives? As the credit crisis unfolded, more than a few corporate dealmakers said they were looking forward to making acquisitions with PE firms out of the way. So they have, and that they've been able to navigate through the financial turbulence is a useful reminder of the distinction between financial and strategic deals, and of the alternately disruptive and constructive interplay between the world of finance and the real economy.
When you're analyzing the stock market or compiling league tables, it makes some sense to put financial and strategic deals in the same spreadsheet. But it also obscures that in their purest forms, they represent opposite poles in M&A. Though some financial deals are steeped in business strategy and none can ignore it entirely, buyouts are fundamentally trades -- arbitrages between the public and private markets, between the costs of equity and debt.
Strategic dealmakers, of course, must also heed the financial markets, especially when they're working for public companies. They can be opportunistic, sometimes to a fault, taking advantage of a competitor's weakness, a currency shift or a controlling family having decided to sell.
But if the current crop of transactions is any indication, today's strategic deals are more likely to be strategic in the deepest sense of the word -- logical next moves in well-developed plans for navigating change.
Hence, Liveris' relative indifference to Rohm and Haas' share price on a given day. For years he has been reconfiguring Dow, using a series of mostly Middle Eastern joint ventures to move its commodity chemical businesses closer to the pricey hydrocarbons on which they depend while also building up in the higher-margin specialty materials that are the forte of Rohm and Haas. When that company became available because the Haas family wanted to diversify its holdings, he could bid with a well-informed notion of what it will be worth as a part of Dow -- plus some highly relevant experience gained in forming those JVs.
InBev's $52 billion agreement to buy Anheuser-Busch is another case in point. It's a huge project but also a foreseeable next step in the long-running consolidation of the global beer business. Realizing cost synergies while giving Budweiser better access to global markets (and InBev's brands better access to North American ones) makes obvious strategic sense. The track record of InBev CEO Carlos Brito and his team in building Brazil's Cia. de Bebidas das Américas and then combining it with Belgium's Interbrew SA in 2003 makes it plausible that they can pull it off -- and no doubt helped them line up $45 billion in lending commitments amid a credit crunch.
Then there's the acquisition of Wrigley by privately held Mars for $23 billion in cash, announced in April. This is another deal that got an assist from Buffett's Berkshire, which provided $4.4 billion in debt and will buy a $2.1 billion equity stake in a new Wrigley division of Mars when the deal is complete. (Berkshire is also a major shareholder in Anheuser-Busch, which puts Buffett on the sell-side of that deal.) For Wrigley, the deal gives it the scale it has been seeking for some time; Mars gets a strong new confectionery unit to which it will turn over its own nonchocolate brands.
Noting the strategic depth of these deals isn't the same as saying they will definitely succeed. In the case of Hewlett-Packard's $13.9 billion cash acquisition of EDS, announced in May, investors were initially skeptical, and there are still many details to be revealed about the plan to transfer HP's services business to EDS. But the idea that HP needs to be bigger in services, and that it will take a deal to get it there, is solid. So is the reputation of Mark Hurd, credited with finally making the HP-Compaq merger a success after coming in as HP's chief executive in 2005.
At least so far, the turmoil in financial markets hasn't stopped strategics from moving forward. And in the case of Verizon Wireless' $28.1 billion acquisition of Alltel from TPG Capital and Goldman Sachs Capital Partners, it clearly created an opportunity. Announced in June, the deal calls for Verizon Wireless to pay $5.9 billion for Alltel's equity and assume $22.2 billion in debt.
Verizon Wireless -- the most logical strategic buyer for Alltel -- let the PE firms prevail in an auction for the target just seven months earlier, declining to pay a price it deemed too high. This spring, when it learned that banks financing the buyout were going to have to unload the bridge loan at a steep discount, it struck. While the PE firms scored a quick gain, the cheaper debt made the clearing price for Verizon Wireless much lower than it would have been the previous fall, according to Ivan Seidenberg, CEO of Verizon Communications Inc. (which owns the Verizon Wireless joint venture together with Vodafone Group plc).
Of course, if things get worse in the banking sector, it's not certain that strategic acquirers will keep finding ways to do big deals, no matter how good a case they can make. The pricing and distribution of the debt for InBev's Anheuser-Busch deal by a group of mostly European and Japanese banks -- J.P. Morgan Chase & Co. is the only U.S. name in the syndicate, which includes Banco Santander Central Hispano SA, Deutsche Bank AG and seven other banks -- will be worth watching.
But as the increase in the total number of strategic deals shows, lots of smaller transactions are taking place. And as Verizon Wireless just proved, a company with a strong balance sheet and a clear sense of where it wants to go can use the currently prevailing winds to its advantage.