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Mergers likely to heat up in '05
by Bill Catlin, Minnesota Public Radio
January 17, 2005

Brimming corporate coffers, increasing confidence among executives, and an expected slowdown in U.S. economic growth are among the factors expected to propel merger and acquisition activity in 2005. (MPR Graphic/Bill Catlin)

Nationally, corporate combinations finally picked up towards the end of last after a slow-down starting in the recession year of 2001. Several factors are likely to fuel more deal making this year. Here's how the trends might affect Minnesota.

St. Paul, Minn. — Corporate America has the means and the motivation to propel another wave of mergers.

Company coffers are full. Corporations have been cutting expenses and profits are up. Firms in the Standard & Poor’s 500 are sitting on some $600 billion in cash. Buyout shops, known as private equity firms, also have lots of cash.

Stock prices are up, giving CEOs another currency to buy with, because mergers are often paid for with stock.

The reduced value of the dollar makes American firms cheaper for foreign buyers.

And executives are just more confident about the future than they were for much of last year according to David Joy, market strategist for American Express Financial Advisors.

"Corporate managements were still quite reluctant to make sizeable, long term, maybe even something you might call an irreversible decision, because they were a little bit concerned about the future, and I think some of that concern is starting to dissipate and confidence is starting to return," says Joy.

The economy appears to be on a stronger footing. But it's expected to slow down this year, making it that much harder for companies to grow on their own. Jeff Rosenkranz with Piper Jaffray says growth is a key factor in a company's share price.

"In an environment like we have today it's very difficult to grow purely organically, and so corporations are looking externally for ways to grow and acquisitions are a natural way to do that," says Rosenkranz.

So, who's likely to be involved in the coming months?

Merger talk has focused on several industries, including telecommunications and information technology, neither of which is particularly prominent in Minnesota. But the financial services and health sectors are, and they saw some of last year's biggest mergers.

Last month the medical device industry saw the $25 billion combination of Johnson & Johnson and Guidant, which has operations in Minnesota. That fueled buzz about other possible deals, including a marriage of Fridley-based Medtronic and Boston Scientific.

Little Canada-based St. Jude Medical comes up as a potential takeover target. It's the smallest of three major firms making devices to treat heart rhythm problems.

None of the three companies would comment, but Piper Jaffray analyst Thomas Gunderson predicts there will be both large and small deals in the med tech industry, because the big players are making lots of money.

"Medtronic generates almost $150 million of cash every month. That's a lot of cash. And with money market accounts and bonds etc., only offering single digit returns, they've got to reinvest that cash," says Gunderson.

Unlike the medical device industry, banking has an extensive track record of mega-deals.

Veteran banking consultant Bert Ely says Minneapolis-based U.S. Bancorp, the country's 6th largest bank, will be a major player in the continuing consolidation of that industry.

"It has one of the really only two or three large, west-of-the-Mississippi banking franchises, and it makes sense at some point in time to combine that with one of the large East Coast companies to form a company that covers even more of the United States than U.S. Bancorp does now," says Ely.

Ely says U.S. Bank is probably big enough to control its own fate, and as a result the company's headquarters is more likely to stay in the Twin Cities after a big deal, though there's no guarantee. Officials with U.S. Bank have maintained that the company is not interested in doing any big deals. They declined to comment for this story.

Ditto for officials at Wayzata-based TCF Financial Corporation, which Bert Ely says is relatively small and likely to be bought up eventually.

Mergers often provoke gloom and doom about loss of jobs and corporate headquarters. But a state study found that companies involved in mergers still saw employment growth, though it was slower than their industries. Despite the loss of the Wells Fargo and Honeywell headquarters in the late 1990s, Minnesota is now home to even more Fortune 500 firms than it was then.