With private equity giant Blackstone Group taking over Equity Office Properties Trust, Nasdaq Stock Markets bid for the London Stock Exchange, and Bank of America’s plan to buy Schwab’s U.S. Trust division, financial services are in the thick of the merger-mania that is sweeping global markets.
According to Sam Stovall, Standard & Poor’s chief investment strategist, about $3.1 trillion in M&A activity has been booked over the past 12 months — with the financial services sector accounting for more than one-fifth of that total.
Within the financial services sector, Matt Albrecht, S&P’s investment bank equity analyst, said the industry as a whole is benefiting from a very strong environment for M&A. “Interest rates have remained at relatively low levels, allowing companies that wish to purchase others to borrow money cheaply,” he said. “Strong equity markets, which have provided acquiring companies with high stock prices an incentive to use that to their advantage, are purchasing companies with shares of stock.”
In addition, Albrecht cited the enormous amount of private equity money currently available. “They are searching out bigger and bigger deals, trying to make a splash for investors,” he said. Indeed, the deal for EOP is valued at $36 billion, including debt, making it the largest private equity transaction in history, surpassing this year’s $33 billion purchase of hospital operator HCA Inc.
“Also, global restrictions are being loosened, allowing more deals to cross national boundaries and are opening up new target markets, such as China etc.,” Albrecht said.
Frank Braden, S&P’s diversified financials equity analyst, noted that some insurance brokers like Willis Group Holding, Brown & Brown, and Marsh & McLennan might make M&A targets. “Marsh had been rumored as a possible take-over target, because they had several business units that had been underperforming,” he said. “Now, however, they have improved performance and are accepting bids for their Putnam business.”
Royal F. Shepard, S&P’s REIT equity analyst, noted that most of the takeover activity under his coverage has been within the office REIT segment, as exemplified by today’s historic EOP buyout. Shepard said his only 4-STARS ranked stock in the office sector is Brookfield Properties. “BPO is well positioned in growth markets, including lower Manhattan, Southern California, Toronto, and Calgary,” he said. “It potentially is a target, although I don’t have any intelligence to suggest anything is imminent.”