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Mergers on track for a record year

With foreign investors out in front, takeovers are projected to top $3.57 trillion, with fees exceeding $11 billion.

September 04, 2007|From Bloomberg News

Forget about Henry Kravis and Stephen Schwarzman. Mergers and acquisitions may set a worldwide record of more than $3.57 trillion before this year ends without a megadeal from the kings of leveraged buyouts.

Bankers specializing in mergers and acquisitions need to drum up only $486 billion in transactions during the next four months to boost fee revenue to more than $11 billion for the first time, data compiled by Bloomberg News show.

Only once in the last seven years, during the takeover drought of 2002, have they failed to crack the $500-billion mark from September through December.

As contagion from the U.S. sub-prime mortgage crisis sidelines Kohlberg Kravis Roberts & Co. and Schwarzman's Blackstone Group, overseas buyers are stepping in. Indian billionaire Ratan Tata and Dubai's Sultan Ahmed bin Sulayem are just two of the investors seeking to benefit while competition is scarce and the dollar is cheap.

"Cross-border activity will keep the volume up for the balance of the year," said Frank Aquila, a partner at Sullivan & Cromwell in New York, the top legal advisor on mergers this year. "Transactions are still being announced."

International buyers will spend more on takeover advice in 2007 than ever before, as higher borrowing costs constrain leveraged buyout firms. Investors from Saudi Arabia to Sweden already have announced $282 billion of mergers and acquisitions in the world's biggest economy, according to Bloomberg data.

That will generate about $820 million of fees for financial advisors, based on the average 0.29% the top 10 M&A arrangers reported in revenue from deals completed in 2006.

Goldman Sachs Group Inc., the biggest U.S. securities firm by market value, has advised clients worldwide on transactions worth $979.6 billion this year, more than any other investment bank. Citigroup Inc. finished the first eight months in second place, with $925.2 billion in announced mergers. It was followed by Morgan Stanley, JPMorgan Chase & Co. and Merrill Lynch & Co., Bloomberg data show. All are based in New York.

"There will be more opportunities for foreign strategic buyers to take advantage of low prices and a cheap dollar," said Ivan Schlager, a partner at Skadden, Arps, Slate, Meagher & Flom in Washington, who counseled France's Alcatel on its $11.8-billion purchase of Lucent Technologies Inc. last year. "Whether the lull in private-equity lending is temporary or longer term, you clearly see a less-competitive marketplace."

Tata, who controls India's largest truck and bus maker, and Dubai's Bin Sulayem are pursuing acquisitions after more than $1 trillion of U.S. stock market value evaporated since July.

Tata said 10 days ago that he wanted to buy Ford Motor Co.'s Jaguar and Land Rover units. Bin Sulayem's Dubai World, the investment arm of the Persian Gulf state, is taking a $5.1-billion stake in Las Vegas casino operator MGM Mirage. He outbid Japan's Fast Retailing Co. last month for luxury-goods purveyor Barneys New York.

Arunkumar Gandhi, executive director of Tata Sons Ltd., didn't respond to phone calls and e-mails seeking comment on Tata's investment plans. Bin Sulayem didn't answer calls to his mobile phone.

Takeovers by overseas buyers account for 26% of all U.S. acquisitions, the most in four years, helping insulate Wall Street bankers from the drop in leveraged buyouts. The value of announced private-equity transactions fell to $19.2 billion last month from $87.4 billion in July and $131.1 billion in June, Bloomberg data show.

The pace of foreign purchases ultimately might match the volume of domestic deals, as investors outside the United States diversify their holdings, said Steve Bernard, head of merger and acquisition research at Robert W. Baird & Co. in Chicago.

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