Monday's $23 billion buyout of chewing gum maker Wm. Wrigley Jr. wwy by Mars and Warren Buffett's Berkshire Hathaway brka is giving investors something to chew on.
The credit crisis and worries about the economy may be cooling merger-and-acquisition activity this year, causing the dollar volume of U.S. deals to fall 32%, Dealogic says. But as Wrigley — the third-largest deal of the year — shows, a window has opened for buyers that have the resources to make offers while other bidders retrench. In Buffett's case, the billionaire investor has expressed interest in Wrigley since at least 1994.
"There's a real opportunity for strategic acquirers to consummate transactions," says Stephen Gaines, head of U.S. corporate finance at KPMG Corporate Finance.
The Wrigley deal highlights how companies are able to take advantage of wobbly stock and bond markets by:
•Broadening product offerings. For Mars, the chance to add Wrigley's lines of chewing gum and Altoids mints justifies the premium it is paying, says Tom Graves, stock analyst at Standard & Poor's.
While Wrigley will be operated as a separate unit, candy bar giant Mars gets purchasing power with suppliers and bargaining power with retailers for better shelf space, Graves says. Such advantages help explain the $80-a-share buyout price, which is 28% higher than Wrigley's close Friday.
The takeover offer values Wrigley shares at 32 times what Graves expected it to earn this year.
•Leading industry consolidation. With credit so hard to come by, companies looking to buy rivals don't have to worry about bidding wars with private-equity funds, says Franklin Allen, professor at the Wharton School. Private-equity funds, which use borrowed money to make acquisitions, have been largely shut out.
So far this year, companies buying other companies in strategic deals have accounted for 92% of the dollar volume of deals, Dealogic says. That's up from 66% during the same time period last year.
Investors immediately wondered if other combinations are in the works or if candy companies' shares are too low, Graves says. Hershey jumped $1.61 to $36.35, Tootsie Roll added $1.49 to $24.76 and Cadbury Schweppes rose $1.18 to $45.98.
•Capitalizing on others' fear. With fewer bidders to compete with, buyers can get better prices, says Roger Aguinaldo of M&A Advisor. Sellers are accepting that prices have come down.
But the Wrigley deal doesn't signal an M&A recovery, Allen says. Many sellers will likely hold out until the market improves. "Expect the market to remain weak for a year or two," he says.