Kraft's takeover approach suggests a change of mood in the deal market
By Katie Hunt
Business reporter, BBC News
Almost exactly a year after the fall of Lehman Brothers and the resulting financial meltdown, there are tentative signs that the corporate world is again ready to contemplate the type of heady deal-making that characterised the boom years.
A £10.2bn ($16.7bn) move by US giant Kraft Foods to take over UK confectionery firm Cadbury has excited investors.
Cadbury has rejected the offer, but its shares have taken heart, encouraged by the prospect that other firms could be drawn into the fray.
"The move injects a further shot of adrenalin into stock markets worldwide," says Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers.
Recent weeks have seen other smaller deals announced, with Proctor & Gamble selling its pharmaceutical business for $3.1bn, Disney buying Marvel Entertainment for $4bn, and Vodafone and O2 reportedly making bids for rival T-Mobile.
Takeovers, often funded with cheap, easily available credit, thrived in the boom years before the credit crunch hit, but have since largely dried up.
Credit has become harder to come by and share prices have fallen, scuppering massive deals such as BHP Billiton's offer to buy rival miner Rio Tinto last year.
Data from Dealogic shows that the value of global mergers and acquisitions has plummeted.
In the second quarter of 2007, deals totalled $1.5 trillion. But two years later, this has more than halved to $626bn.
"There's no doubt that overall M&A activity remains very depressed, especially compared to the boom times," says James Edsberg, a partner at management consultants Lighthouse.
That is not to say that big takeover and merger deals have not taken place during the downturn, but those that have occurred have tended to fall into two categories:
- Shot-gun marriages forced on banks by regulators fearful of their imminent collapse without a stronger partner. These include the merger of Lloyds TSB and Halifax in the UK and Merrill Lynch and Bank of America in the US.
- Prudently managed companies picking up struggling firms at bargain-basement prices. For example, Spanish bank Santander's takeover of UK bank Alliance & Leicester and its purchase of Bradford & Bingley's best assets.
"For those who are cash-rich, the there has been a once-in-a-lifetime opportunity to pick up distressed assets," Mr Edsberg says.
"But if you are heavily in debt, then your hands have been tied."
Change of mood
An unsolicited bid by a US blue-chip firm such as Kraft is a first since the onset of the credit crunch.
"Deals like this are relatively rare and if you're Kraft, you might consider that prices aren't that high at the moment," said Martin Deboo, an analyst at Investec Securities.
It suggests that some animal spirits may have returned to the deal market and that corporate valuations might not remain depressed for much longer.
Cadbury is not struggling and has weathered the downturn relatively well, with hard-up consumers seeking out chocolate as cheap comfort food.
Kraft's cash-and-share offer is the equivalent of 745 pence for every Cadbury's share. While not considered overly generous, it still marks a 31% premium to its closing price last week and 42% more than the firm's shares were worth in early July.
Industry analysts have also been speculating that Kraft could raise its offer and counter-bids could emerge from the likes of Nestle and Hershey's.
"This is a serious bid from Kraft and the offer is in the ballpark. It might be short of a knockout blow, but the story will run from here," Mr Deboo added.
But while Cadbury looks set to become embroiled in takeover fever, the jury is still out on whether Kraft's bold move heralds a wider recovery in the deal market.