Deals Now Make Sense, Not Just Money

Some eye-poppingly big transactions have been announced in the past few months, including Michael Dell’s acquisition of Dell, the combination of Office Depot and Office Max, and Berkshire Hathaway and 3G’s acquisition of Heinz. But while these catch our attention, we are nowhere near a return to the go-go years before the financial crisis.

Back then, private equity firms rushed to acquire companies to take advantage of the credit bubble and chief executives seemed to want nothing more than to take their companies private on the cheap. Today's deal are more about building up than cashing in.

Not only the attitude but also the numbers are different. According to Dealogic, the dollar value of U.S. mergers and acquisitions so far this year is $233 billion, more than double last year. But there were almost 10 percent fewer deals than last year.

So, what is really going on is that we’ve had a few large transactions that have skewed the numbers and driven bubble talk. And these big deals show how M&A has changed and that this time may be different. Back in the Internet bubble, C.E.O.'s rushed to acquire companies and overpaid, Time Warner’s acquisition of AOL being the most prominent of these deals from hell. But now mergers and acquisitions are more cautious and done on a must-need basis. C.E.O.'s and boards just do not want to take on a risky deal in this choppy economic environment. In the case of Dell and Office Depot and Office Max, this is more survival M&A. These companies are looking to M&A to fix their businesses. Dell, for example, needs to restructure and wants to do so in the private sphere. Office Depot and Office Max need to get bigger to compete with Amazon and Costco. And in Heinz’s case, Warren Buffett and 3G are making a careful acquisition, paying a conservative price in an area where they have previously been able to add significant value. In other words, these transactions while disruptive are being done to create value and deal with a changing world, good reasons why companies have historically acquired one another.

The Dell case also shows another heartening development in mergers and acquisitions: shareholders are fighting back against what they perceive as underpriced deals. While still rare, the rebellion going on at Dell will keep executives on their toes when they try to do deals.

It’s likely that both of the trends highlighted will continue. This means that companies that do deals will be forced by the economy to soberly assess the risk and not get in over the heads. And sure, there will always be deals that don't make sense, either because they are anticompetitive or because they are examples where chief executives are taking advantage of their positions to take over the company. Private equity firms in particular will be tempted to speculatively bid, since there is cheap credit still and they have lots of left over money from the crisis. But over all, the recent uptick in large M&A deals has promise for helping companies ride out the economic turbulence. And that’s where we’ll continue to see the large M&A deals appear. Call it the era of cautious M&A.

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