This January's heady M&A activity suggests that dealmaking is back with a bang. Global M&A volume grew 36%, to $271.3 billion, over the same month a year ago, according to Dealogic (Holdings) plc. But even if this pace continues, that doesn't necessarily mean that corporate boardrooms are about to succumb to M&A fever like they did precrisis. For one thing, many CEOs are still busy bushwhacking through their balance sheets, divesting businesses and assets accumulated during the last bull market. That pruning is far from done -- even for those who want it to be.
Take Yahoo! Inc. A year ago, CEO Carol Bartz promised analysts that 2010 would not be about divestitures. The next 12 months, she vowed, would be about "acquisitions and investments to make Yahoo! even stronger." Those comments seemed to suggest that Yahoo! had finally chopped away the deadwood accumulated during a five-year spending spree through 2007.
Not quite, it turned out. While acquisitions in 2010 grew to nine from six the previous year, Yahoo! also disclosed six divestitures, up from four in 2009, according to Dealogic. "I think in the earlier days, Yahoo!'s corporate development was run like a venture capital group, buying stakes that had high option value -- with the idea they would build new legs to the stool," says one analyst. "But none became significant enough."
Ditto for hundreds of other companies that gobbled up assets in the precrisis days, when borrowing was cheap and CEOs in industries including finance, industrials and healthcare grabbed for growth wherever they could. Jeff Weirens, a principal in the merger integration and divestiture practice at Deloitte LLP, suggests the contrition will continue. His group conducted a survey of 304 executives and found that 87% expect divestiture activity to be "consistent or increase from the prior year's volume" in 2011. "We have never been busier on the divestiture front," Weirens says.
Last year, oil and gas and healthcare topped the list of industries with the most divestitures, averaging 23% and 10%, respectively, of total divestitures. Almost half of 40 energy companies divested more businesses and assets than they gained in new deals. Exxon Mobil Corp. divested 12 businesses and did no acquisitions, at least where public values were disclosed.
In the industrial sector, General Electric Co. divested 23 businesses and assets, compared to 16 acquisitions.
Finance was also a hot spot, especially among banking conglomerates, which have been scrambling to shed noncore assets and shore up capital as Basel III looms. Last year, the major banks divested far more than they bought: Bank of America Corp. did 13 divestitures versus five acquisitions; Citigroup Inc. 13 versus 10; Morgan Stanley nine versus five; J.P. Morgan Chase & Co. 14 versus six; and Goldman, Sachs & Co. 17 versus 10. And they're far from done, analysts predict.
"I think we'll see all financial conglomerates shrink significantly," says David Knutson, senior research analyst at Legal & General Investment Management America Inc. "The financial sector is going to be on a serious diet in terms of asset disposition. We'll see a different landscape three years from now."
This diet will continue as shareholders and investors continue to demand simpler stories and better returns. "I think this cycle is somewhat different from past cycles, where companies were doing more complex deals first and then clearing up noncore businesses after the fact," says Scott Humphrey, executive managing director and head of BMO Capital Markets Corp.'s U.S. mergers and acquisitions group in Chicago. "Now we're seeing more corporates seek only the strategically important businesses or assets. That's what the Street is expecting them to do."
Investment bankers are only too eager to help. "There's an army of investment bankers pitching to management of financial and nonfinancial companies that their equity valuation in the market would be greater if they got rid of this stuff," Knutson says, referring to noncore assets still weighing on balance sheets. But even for those eager to chop away their deadwood, some are holding off because they're already stumped on what to do with existing excess cash.
"When I sit down with companies, the resistance isn't to the divestiture itself, but more if they're getting rid of something, what are they doubling down on?" says Gerald Adolph, senior partner with Booz & Co. in New York. "If it's a healthy company, they're asking, what am I doing with the cash? I understand the defocusing, but what am I focusing on?"
As many revisit their balance sheets for 2011, they may do well to borrow from the earthier wisdom found in gardening manuals: Timely pruning tends to lead to healthier growth.