All-stock M&A makes a comeback in turbulent year

LONDON, Dec 23 - Frozen debt markets and a slew of bank tie-ups prompted a jump in all-stock mergers and acquisitions (M&A) in 2008, and bankers say next year will also be a busy one for such all-paper deals.

Share-for-share M&A will allow companies in struggling industries to bulk up without having to deplete much-needed cash, or trying to raise scarce and costly debt finance.

But advisers caution these deals can be harder to agree than straightforward purchases and might prove difficult to accomplish until share markets stabilise.

"Naturally when financing is tight, it makes sense to think of stock-for-stock deals," said Zachary Brech, head of M&A in the UK for Credit Suisse.

"There will be various industries, perhaps in manufacturing and consumer goods, where we see industry-changing deals, and many of those are likely to be stock-for-stock deals."

Carlo Calabria, Merrill Lynch's head of M&A for Europe, the Middle East and Africa (EMEA), said: "We're pushing stock-for-stock deals actively and they are likely to make a comeback."

"WHEN PRICES ARE CRUSHED"

While the intensifying credit crunch led to a plunge in overall M&A volume this year, Thomson Reuters data show all-share M&A leapt 27 percent to $468 million, making it the busiest year by dollar value since 2000.

In contrast, cash deals -- often financed in the boom years by debt on easy terms -- fell 40 percent in dollar terms to $1.13 trillion, accounting for the smallest share of the overall market since 2005. Hybrid deals, which mix stock and cash, fell 60 percent to $167 million.

The data cover previous full years and this year to Dec. 19. They do not include transactions where Thomson Reuters could not determine how the deal was paid for, while a fourth category groups deals which involve other payments, such as dividends or third-party receivables.

In all-share deals, behind the spin-off of Marlboro cigarette maker Philip Morris International Inc, three of the year's four biggest deals were in banking: the purchases of Merrill Lynch & Co by Bank of America Corp in the United States, HBOS Plc by Lloyds TSB Group Plc in Britain and St George Bank Ltd by Westpac Banking Corp in Australia.

Bankers say paying in paper can also help transactions succeed when shares are in the doldrums and a cheap cash purchase would be hard for the target's shareholders to stomach.

"The other merit is when prices are crushed, it's much easier for two companies to reach an agreement on relative valuation," Credit Suisse's Brech said.

"NOTORIOUSLY COMPLEX"

As the faltering global economy pressures many industries, bankers expect much of 2009's dealmaking to be distress-driven as industries consolidate and ailing companies hive off assets.

"Those distressed sellers looking to pay down debt through asset disposals will be focused on cash," said Liam Beere, joint head of M&A for EMEA at UBS.

But Beere added: "For those companies that don't have the option to sell assets, an all-stock deal for the whole company may be the only solution to their borrowing problem." Calabria at Merrill Lynch added: "Consolidators will try to do stock-for-stock deals, with a reasonable premium, or partial-cash, partial-equity deals. But you need volatility to come down."

Stock markets have swung wildly this year, with the most widely watched marker of volatility, the "Vix" or CBOE Volatility Index, reaching a record 80.86 on Nov. 20.

The Vix, which is based on near-term S&P 500 options, closed at 44.93 on Friday and Calabria said it needs to fall to 25 to 30 if stock-for-stock deals are to further grow in importance.

The end of talks last week between British Airways Plc and Australia's Qantas Airways Ltd also illustrates some of the perils of tie-ups between similiarly sized companies, whether or not they constitute genuine mergers of equals.

The two failed to agree on key terms, a major sticking point being Qantas's demand for more than half of the merged company.

Mergers can throw up a range of disagreements on everything from the combined company's strategy and headquarters to its name and which executives fill which jobs.

"Mergers are notoriously complex to implement," said Beere at UBS. "Issues such as relative market ratings, company sizes and which roles go to which management mean that it is often easier to structure the deal as an acquisition."