Market overview

Despite the initial market surge in reaction to the Fed’s larger than expected rate cut last week, underlying concerns about US economic performance continue to persist.  The housing market and inflation are the primary concerns for Wall Street, especially after the National Association of Realtors reported that sales of existing homes declined for a sixth straight month in August, pushing activity to the lowest point in five years. As the volume of home sales have declined, so too have home prices. According to the S&P/Case-Shiller home price index, the decline in U.S. home prices has accelerated every month this year, posting the steepest drop in 16 years in July. 

Consumer confidence, which has eroded along with home prices, did not catch the same interest cut wave as the markets. The New York-based Conference Board said its Consumer Confidence Index fell to 99.8 in September, an almost 6-point drop from the revised 105.6 in August and the lowest level since a 98.3 reading in November 2005, after hurricanes Katrina and Rita devastated the Gulf Coast. The reading was well below the 104.5 that analysts had expected.

The Fed’s rate cut has also had a significant impact on the US dollar.  The Canadian dollar, which has experienced record highs before the cut on high crude prices and a strong economy, reached parity with the US dollar for the first time since 1976.  Middle Eastern countries have been hit hard by the falling dollar as well, as the dollar currency peg policy of US allies in the Gulf region has led to money supply growth and growing inflation.  Saudi Arabia refused to cut rates with the Fed for the first time and Kuwait recently dropped its dollar peg, indicating that economic concerns about the dollar peg are beginning to rival the political implications of abandoning such the policy.

Deal overview

Despite concern over the impact of tightening credit markets on the future of large leveraged buyouts, deal flow has continued. On Tuesday, Clear Channel Communications shareholders approved a $19.5 billion buyout, after the deal was sweetened several times to overcome shareholder opposition.  The deal, which took more than 10 months from proposal to approval, was agreed to after the acquiring private equity group, led by Thomas H. Lee Partners and Bain Capital Partners, agreed to pay $39.20 per share in cash or stock.  On another large leveraged buyout, Kohlberg Kravis Roberts & Co. and GS Capital Partners recently informed Harman International Industries they were walking away from their $8 billion buyout, due to a “material adverse change” in the business.  As the word of the failed deal leaked out, Harman shares lost over 24% of their value.

With the falling US dollar, the number of foreign buyers targeting US companies is expected to continue to grow.  A recent high-profile foreign acquisition is the Borse Dubai’s purchase of a 20 percent stake in Nasdaq. Borse Dubai, the government-controlled exchange, agreed to take a percent stake in Nasdaq, buy Nasdaq’s 28 percent stake in the London Stock Exchange, and bow out of its six-week bidding war with Nasdaq for OMX, a Stockholm-based equity market operator.  The deal will be reviewed under a new law enacted after the security concerns that followed Dubai Ports World’s planned acquisition of a company that ran US port security, but is not expected to meet with similar opposition.

This month’s metric looks at the trend of cross-border merger and acquisition deals in the United States.  As the exhibit clearly illustrates, cross-border deals are growing as a percent of total US deal volume.  Although US buyers continue to be active in acquiring international companies, international buyers seem to be accelerating their pace in acquiring US targets, as these transactions have almost doubled their share of total deal volume since 2004.

A myriad of factors are driving this growth, but several key point are worth highlighting:

• Global buyers are more prevalent:  More than ever before, multinational companies consider acquisitions as a key driver of growth.  Two examples of this are Saint Gobain and Alfa-Laval, both of which have made acquisitions recently to expand their US presence.  The former acquired Norandex, which ranks among the top 15 building merchants in a highly fragmented market US market.  Alfa-Laval added a complementary channel to US dairy and food processing industries by acquiring AGC Engineering, which provides sanitary plate heat exchanger services and equipment to that industry.
   
• The increasing globalization of businesses: Cross-border deals have grown simply because business has become more global.  Companies continue to seek new markets, new customers, new products and new operational capabilities in economies outside their home base -- or risk being left behind by their more global peers. A clear example of this is Autonomy’s acquisition of ZANTAZ, a leader in content archiving and electronic discovery solutions.  With this acquisition, Autonomy expanded the addressable market, distribution and reach for its highly successful products into rapidly growing markets in the US.
   
• Weakening of the dollar: Although there is some controversy about the importance of this as a factor driving cross-border deals (many industry practitioners think – and we agree – that companies should consider cross-border acquisitions based on fundamentals and not on the basis of currency arbitrage); a weaker dollar does make US companies more affordable to a wider base of international buyers.