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May 08, 2007

Global M and A: Fill in the Blanks
by Adrian Ash

"...The previous top of 1999-2000 feels more like false memory syndrome than a warning from history..."

GOT TIME for a quick round of Blankety Blank, the classic British gameshow from the '80s?

If you were lucky enough to miss it, just think of America's Match Game - only with the value of prizes capped by government diktat. (Yes, really...) Then simply write down the word that best completes these well-worn phrases below.

Remember - the clue is in the question!

"Huge deals fuel record-breaking BLANK," says the Financial Times. Its market report this morning added that "BLANK activity thrusts New York to fresh peaks."

"European stocks set new 6-year high on BLANK," reports Reuters. "FTSE ticks down on oils; BLANK supports."

"Stent failure a crack in BLANK for J&J," according to the Wall Street Journal. "Lawyers win in European BLANK banking battle," adds a note on its legal blog.

"Canada's Dollar climbs to 11-month high amid BLANK optimism," reports Bloomberg. Nearly 600 Canadian companies have now been subject to foreign BLANK since the start of last year, it goes on. The newswire itself has published 15 stories about global "BLANK" pushing asset prices higher in the last week alone.

Got your answer yet? What single thing could possibly provide such rocket fuel - pure liquid hydrogen - to support, thrust, fuel and send stocks, indices, funds and even currencies soaring to fresh highs almost every day...?

Okay, let's reveal the legend. "Global mergers and acquisitions volumes leapt over the $2,000bn mark on Monday," reports James Politi for the Financial Times in New York, "as the pace of corporate deal-making in 2007 continued to exceed even the rosiest predictions on Wall Street and in the City of London."

In short, M&A is the missing blank in any review, preview or analysis of today's financial markets. Buying up an entire listed company...and any listed company will do, it seems...is the only game left after six years of easy money worldwide.

According to Dealogic, the financial consultancy, M&A activity since the start of 2007 has outpaced the same period in 2006 by nearly two-thirds. March this year was the busiest month in history - right up until April got started. The previous top for M&A spending was the DotCom Bubble of 1999-2000. But now that feels more like false memory syndrome than a warning from history.

"The [global] boom in transactions is being driven by a combination of cheap debt to finance acquisitions, a benign antitrust environment, particularly in the US, and globalisation, which is forcing companies to reassess their competitiveness and their mix of businesses," says the FT.

Hence Alcoa bidding for Alcan to create the world's largest aluminum firm. Alcoa itself "could become merger prey," adds the Wall Street Journal, just in case a fresh M&A rumor has passed it by. Merrill Lynch says private equity might be set to buy BHP Billiton, the world's largest mining group. BHP itself could now be preparing a bid for Rio Tinto, according to the latest rumours. Thomson, the newswire service, is bidding £8.8 billion for Reuters - a 42% premium to Reuters share price of only four days ago. ABN Amro, the under-performing Dutch investment bank, has now got so many suitors, it's using the courts to scuttle fresh bids unless they add a couple of billion to their offer.

"Doubts remain about the sustainability of the global M&A boom," warns the FT darkly, "particularly if fears of a sharp slowdown in the US economy were to materialize."

But aspirations for strong US growth are NOT what's underpinning this historic bubble in corporate activity. Even investment bankers know that elephants don't gallop; yet the size of corporate takeovers has grown as their number has slipped - down more than 21% in Europe so far this year, and down by nearly one-quarter in the United States. Instead, it's simply a case of money making money, as ever.

Anyone's money will do, just so long as there's plenty of it. That's why the busiest sector by far is financial services, witness to $410.6 billion of equity changing hands in corporate deals - nearly twice the spend in energy, the next busiest sector. Indeed, the financial services sector is both leading and driving this bull market as Citigroup has beaten Goldman Sachs, last year's winner, for the title of No.1 corporate adviser so far in 2007. It's outstripped the value of J.P.Morgan's deals - the second busiest corporate deal maker - by around 7% at $586 billion since January.

What's at stake goes far beyond a few measly basis points on the cost of borrowing. Look at Lazard, for example. So far this financial year it's restructured New Century Financial, the failed subprime mortgage lender; advised on Barclays attempt to merge with ABN Amro for $91.3 billion - the "largest bank merger with ABN in history"; overseen €43.7 billion in the Endesa deal; helped set up the biggest ever leveraged buy-out, selling TXU to a private-equity group for $45 billion; advised on Mellon Financial's $16.5 billion merger with the Bank of New York...KeySpan's $11.8 billion sale to National Grid...the Chicago Board of Trade's plans to merge plus American Standard's plans to separate out its businesses...

...and STILL the poor investment bank comes way down the table of Wall Street rainmakers!

Lazard's financial advisory division accounts for more than half its top-line profits. But revenues were barely changed during the first quarter. Morgan Stanley, meantime, achieved a 10% rise. Goldman Sachs grew its advisory revenues by 17%.

Lazard shareholders worried their investment isn't performing can no doubt take comfort in the hope of a predatory offer. For just as in the classic TV gameshow, losers in today's Blankety Blank financial markets never go away empty handed.

The twist in 2007, however, is that their consolation prize - a free Blankety Blank Chequebook and Pen - can now be used to buy more financial assets in fresh M&A deals. The true value of productive enterprises might not be improved; it may even be put at risk.

But so what? It's only a game, after all.

Adrian Ash
BullionVault.com

Head of research at BullionVault.com, the fastest growing gold bullion service online, Adrian Ash is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.

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