Acceleration of M&A might make unemployment even worse
Reposted from International Business Times | By Palash R. Ghosh
After more than two years of lethargy, mergers-and-acquisition activity appears to have made a strong comeback this summer.
While that may spell good news (i.e., profits) for traders, bankers, lawyers, company insiders and shareholders, it may also exacerbate an already dire unemployment picture in the U.S. and Europe (where the jobless rate remains stubbornly high, just under 10 percent).
Because, regardless of the industry, M&A means consolidation, redundancies and overlap, which typically lead to job cuts.
Anglo-Australian miner BHP Billiton (NYSE: BHP) has made a $40-billion hostile bid for fertilizer-maker Potash Corp. of Saskatchewan (NYSE: POT), which is seeking other potential bidders; Burger King Holdings Inc. (NYSE: BKC) is being sold to private equity firm 3G Capital in a transaction valued at about $3.26-billion; and Hewlett-Packard (NYSE: HPQ) just bought out data storage company 3Par for about $2.4-billion.
A few days ago, private-equity firm Bain Capital said it will acquire children clothes-maker Gymboree Corp. (NASDAQ: GYMB) for $1.8-billion, making it the biggest buy-out so far this year within the teetering retail industry.
Plus, there are a plethora of rumors and speculation about other potential mergers, including some of the biggest names in the corporate landscape, including Microsoft (NASDAQ: MSFT) and Oracle (NASDAQ: ORCL).
“We have seen a definite pick-up in M&A deal-making after two years of stagnation,” said Anthony Alfonso, president of BDO Valuation Advisors. “There is a mountain of cash that has been sitting on the sidelines; and now we're seeing some of that money put to use.”
Alfonso estimates that during the 2008-2009 period, deal-making decreased by about 75 percent.
Page West, professor of strategy and entrepreneurship at Wake Forest University School of Business in Winston-Salem, N.C., attributes the pick-up in M&A activity to several factors.
“First, since the recession, corporations have focused on cost reductions, and compared to 2008-2009 [they] are now reporting higher levels of profitability, with improved cash flows and cash positions,” he said. “Acquisitions are one possible use of excess cash, especially when there are not other better uses. Corporations are also interested in generating growth, and this is often more quickly accomplished by buying companies compared to creating growth organically by developing and introducing new products and services.”
Also, West added, since stock prices are not exorbitantly high in the current economic environment, this situation presents better opportunities for acquisitions than if the target companies' stock prices were soaring.
Alfonso expects to see an acceleration of M&A activity in the coming months. By some estimates, there is at least $3-trillion in cash on the sidelines, and with interest rates so low, it makes no sense to park that money in the bank.
“I think we'll see M&A deals across all sectors, but my gut tells me we will see the heaviest activity in the technology area,” he said.
“We are also likely to see a lot of deals made in distressed industries like home-building, building products and retail, where they will have to consolidate in order to survive.”
Unfortunately, the more M&A transactions that occur, the more jobs will likely be lost – particularly in cases where a target company was bought at a premium.
In the case of BHP's proposed takeover of Potash, shares of the target company are trading at half their value from two years ago – making it a very attractive candidate.
Moreover, BHP is trying to appeal to Canadian government authorities to back their bid by promising to keep jobs in the provinces of Saskatchewan and New Brunswick for the foreseeable future.
Some are skeptical that a takeover of such magnitude would not include job eliminations.
In the banking sector, First Niagara Financial Group (NASDAQ: FNFG) has agreed to acquire NewAlliance Bancshares (NYSE: NAL) in a deal that is expected to reduce NewAlliance's annual operating expenses by 20 to 25 percent. These cost-saving measures will surely include job reductions.
In Pennsylvania, governor Edward Rendell has asked the state's utility regulators to block the proposed $4.4-billion takeover of Allegheny Energy (NYSE: AYE) by FirstEnergy Corp. (NYSE: FE) of Ohio, because the merger would eliminate up to one-thousand jobs.
"This merger would be a great deal for Wall Street and Ohio, but terrible for Pennsylvania's workers and consumers," Rendell was quoted as saying of the bid.
Across the ocean, Lloyds Banking Group of the U.K. said it plans to cut 4,500 jobs in its information-technology division in connection with its 2009 merger with HBOS.
Lloyds, which has already slashed its workforce by 22,000, has been criticized by British union officials since the company was bailed out by the government and is currently 41-percent held by taxpayers.
Dozens of other similar tales proliferate – jobs are typically lost in the wake of corporate merger activity.
However, Professor West of Wake Forest is not entirely convinced that new M&A activity will automatically translate into more job losses.
“The most successful acquisitions are those which focus on leveraging and/or transferring capabilities in order to achieve growth,” he said. “The types of synergies required to produce positive returns for shareholders of acquiring companies cannot ordinarily be generated by simply cutting costs – and labor costs are only one possible source of cost cuts.”
Moreover, Alfonso points out that in cases where a corporation or private-equity firm buys out a financially-distressed company, jobs are actually saved since the acquirer is providing a lifeline that ordinarily would not have been available.
Still, in an environment of such high and prolonged joblessness, a flurry of M&A deals is unlikely to bring much cheer of the swelling ranks of the unemployed.