Over the past few months, big U.S. companies have been caught between pressure to spend cash hoards and the realities of operating in a wildly unpredictable global market. Faced with whipsaw volatilities and restless shareholders who disdain the whiff of excess cash, CEOs and their corporate development teams -- the very executives we feature in our CD 100 listing that begins on the next page -- are struggling to carve out long-term strategic goals.
A glance down the list of the biggest U.S. companies by market cap suggests that CEOs and their corporate development teams are coping with this challenging environment in a number of ways, with varying degrees of success. Some are gunning for growth in epic-sized acquisitions aimed at transforming future revenue streams. Some are sitting on their cash.
AT&T Inc., for instance, went for broke in March when it announced a deal to buy T-Mobile USA Inc. for $39 billion -- a huge transaction that could easily backfire after the U.S. Justice Department moved to block it in August. In a deal that's been more favorably received, Google Inc. announced in August it was buying Motorola Mobility Holdings Inc. for $12.5 billion -- its biggest acquisition to date. Motorola Mobility would transform the Internet giant, which makes the Android mobile operating system and operates the world's most popular search engine, into a cellphone manufacturer, pitting it against the formidable, if Steve Jobs-less, Apple Inc.
The scale of some of these deals, including Kinder Morgan Inc.'s pending purchase of El Paso Corp. for $37 billion, helps explain why U.S. M&A volume, at $920 billion year to date, is higher than the $896 billion for all of 2010, according to Dealogic.
But don't be deceived. For one thing, a handful of giant deals -- the AT&T and Kinder Morgan transactions in particular -- account for a major portion of overall deal volume. In reality, M&A activity has been slowing. In October, global M&A volume reached the second-lowest four-week period since April 2010, while September was the slowest since October 2009. While global uncertainties have sidelined buyers and sellers, CEOs have been spending their spare time seeking assets to sell that aren't part of their core business. Nowhere is this more evident than in the financial sector.
Under pressure to deliver long-term strategic growth, some companies have hatched plans that quickly, and disastrously, fizzled. Take Hewlett-Packard Co.'s short-lived scheme to spin off its personal-computer business -- a move that led to the abrupt ouster of CEO Léo Apotheker after 11 months on the job. Netflix Inc. also backpedaled on plans to unload its DVD mailing service, less than a month after it disclosed the plan to angry customers and shareholders. Most observers describe both moves as lapses in C-suite judgment.
But both aborted spinoffs do point to pressures that companies face in making tougher cases for long-term value propositions. "Pure-play companies tend to command better value," says Richard Jeanneret, Americas vice chair of Ernst & Young's transaction advisory services. "More companies are breaking into parts, [which makes them] more accessible for other buyers. Companies tend to get more of a premium that way."
CEOs and their deal teams are clearly thinking along these lines, with many focused as much on divestitures as on acquisitions. For the first nine months, global spinoffs stood at $94 billion -- more than 2-1/2 times the volume for the same period in 2010 and the highest volume in three years. Many are just getting started, based on the findings of an M&A survey that Ernst & Young conducted. The firm found that 26% of companies that responded see divestments as "likely or highly likely" over the next 12 months, a 30% increase since April.
Even a long-term performance leader in its industry, such as Abbott Laboratories, is buckling down and rethinking its business. In October, Abbott said it plans to split itself into two publicly traded companies -- one focused on diagnostics and medical devices, the other on research-based pharmaceuticals -- to unlock greater shareholder value. Although the company has said it has no plans to sell itself, some analysts have suggested the pharma business could be an acquisition target.
Still, this kind of speculation reflects an increase in acquisition opportunities that have gone hand in hand with the step-up in divestitures and breakups over the past several months. So far, the biggest beneficiaries of this divestiture surge have been middle-market companies seeking growth opportunities.
"We are seeing a significant increase in the past several weeks on the level of midmarket acquisitions, both in some of our traditional segments as well as digital-media properties," says John Zieser, chief development officer and general counsel at Chicago-based Meredith Corp. Companies are "getting pressure from their institutional shareholder base to divest noncore assets. McGraw-Hill selling their television broadcast group is an example of this," he says. In October, the publisher announced it was selling the group to E.W. Scripps Co. for $212 million.
Zieser says he has jumped at emerging opportunities as others shed assets. Over the past few months, he has closed five acquisitions, including the October purchase and license of the Rachael Ray franchise from Reader's Digest Association Inc. These kinds of midmarket buying sprees are why global midmarket M&A over the past nine months has totaled $565 billion -- the highest since 2007, according to Dealogic. Many of the middle-market acquisition opportunities are coming from bigger companies shedding midsized and smaller assets.
Over the next few months, it looks as if these opportunities will keep coming. It's not that bigger companies don't want to do deals. All that cash is burning a hole in their pockets -- there's roughly $1.8 trillion squirreled away across U.S. industries, mostly in technology, pharmaceuticals, energy and consumer products.
"On the strategic buyer side, I think appetite has not been this strong in a good while," says Scott Humphrey, head of BMO Capital Markets' U.S. mergers group in Chicago. "What we're dealing with now, though, is the macro environment and how much shock the market will withstand." He believes this uncertainty will put a damper on bigger, transformational deals over the next 12 to 24 months, saying that unless there's a significant revaluation in different sectors, "there's very little upside for a CEO to try and do a big transformational deal."
But even when markets settle down, he sees a more fundamental shift among conglomerate-type companies as many struggle to generate consistently strong returns across disparate businesses. "I think this model is going to be a tougher one to get credit for in the market [as time goes on]," he says.
All of this suggests that corporate development teams at larger companies may be finding new ways to spend their time in the months ahead as they earmark assets to sell. For those accustomed to the glitz of closing a big deal, this could mark a certain comedown. But as seasoned dealmakers have acknowledged before, good corporate development teams -- those with track records for spotting value and executing integrations -- also tend to be the savviest about when to let the deadwood go and prepare for more strategic deals down the road.