Market Overview

The Federal Reserve again left rates unchanged at its December 12^th meeting, the fourth straight meeting in which rates have remained at 5.25 percent.  Fed statements issued from the meeting, as well as members’ actions, reveal continuing concern over inflation.  Highlighting the remaining concern about inflation was the vote of Jeffrey Lacker, president of the regional Fed bank in Richmond VA, whose dissenting vote called for a rate increase of 25 basis points.

Concern about inflation proved to be prescient, as November inflation at the wholesale level showed its biggest jump in 30 years. The producer price index, buoyed by rising gas prices, jumped 2 percent in November, far higher than the expected increase of 0.5 percent. The core PPI also showed a surprising jump, gaining 1.3 percent, after several periods of declines.  The PPI reports came in stark contrast to the previous week’s report that consumer prices were flat for November and raises the question of additional pricing pressure down the road.

In addition to inflationary concerns, global markets have helped to dampen the stock market recently.  News that Thailand, concerned about speculative investment in the Thai baht, had announced early this week new controls on foreign investment was greeted by sell-offs in the Asian markets.  The Thai government’s announcement, sparked by concerns that the rising would harm exports, caused the stock market in Thailand to plunge nearly 15 percent and sparked selling in the region.  The government later announced it would partially lift the controls on foreign investments, allowing investment in stocks but keeping in place requirements that banks hold in reserve thirty percent of foreign capital inflows in bonds and commercial paper and penalize foreign investors who withdraw their funds in less than a year.

M&A Overview

Private equity deal flow continues unabated, heading toward what could be a record year. According to Merrill Lynch, private equity firms are on track to raise $146 billion by the end of the year, the highest total since $182 billion was raised in 2000.  Large private equity deals continue to dominate the headlines and buyout rumors circling companies such as Home Depot and Deere & Co.  One of the most recent deals announced was that of Apollo Group’s offer to purchase Realogy Corp. for $6.65 billion. Realogy (which owns Coldwell Banker and Century 21) and was one of four divisions to be spun off from Cendant Corp. in July, may not be the last Cendant division to be snapped up, as Wyndham Hotels continues to spark take-private rumors.

Outside of the private equity arena, CVS’s announced deal to acquire Caremark RX in a $21.2 billion stock deal just got more interesting, as Express Scripts Inc., the number three pharmacy benefit management company behind Caremark, has jumped into the ring with a $26.0 billion cash and stock bid. Although Caremark has publicly stated it remains committed to its agreement with CVS, the higher valuation and upfront cash component of Express Scripts offer may entice some shareholders and force CVS to up its bid in order to complete the transaction.

This month’s metric explores the correlation between the number of acquisitions a buyer effects in a 12 month period and the industry of the chosen target.  The above Exhibit illustrates the percent of all M&A deals in the last twelve months that were completed (closed) by a buyer who acquired one, two, three, or more than three companies.  The Exhibit demonstrates that the majority of transactions across all industries involved one-time buyers. 

However, it is important to note that 10% of all transactions involving software companies were effected by buyers who purchased two companies in the same 12 month period.  This statistic stands in contrast to the 8% of buyers of industrial product companies and 9% of business services companies that can make an analogous claim.  Although small, this difference suggests that buyers who focused on buying software and business services companies closed more deals on average in last 12 months than those buying industrial product companies.  

One factor giving rise to this difference might be the consolidation trend in the software industry for the past five years.  Buyers of software companies continue to acquire smaller firms to gain critical mass in selected markets, recruit key talent and/or add critical technologies to their portfolios.  Another factor could be that software companies tend to be smaller than those in other industries and consequently are easier to finance and to integrate.  The median enterprise value for software companies that were acquired in the last 12 months was $11 million.  The same measure for industrial product and business services companies was $18 million and $14 million, respectively.