By Dana Mattioli And Dana Cimilluca
Deal making among health-care companies continues to improve the
well-being of the mergers-and-acquisitions SHYmarket.
Driven by takeovers like AbbVie Inc.'s March agreement to buy
cancer-drug maker Pharmacyclics Inc. for $21 billion, merger
activity among health-care companies rose 108% year over year in
the first quarter, to $126.4 billion, according to Dealogic. That
is the second-highest total for the period on record after 2009,
when $136 billion of the deals were struck. Health care was the
busiest sector for M&A globally in the quarter. In the U.S.,
the sector generated more than a quarter of all M&A
activity.
The boom is providing a major lift to an M&A market that,
after years in the doldrums, has come roaring back to life.
Overall, deal volume in the first quarter rose 24% to $874.1
billion globally. In the U.S., it jumped 30% to $405.7 billion. A
final lift in the quarter came from the announcement March 25 of a
non-health-care deal: the roughly $50 billion purchase of Kraft
Foods Group Inc. by 3G Capital Partners LP and Warren Buffett's
Berkshire Hathaway Inc.
Bankers and lawyers who help arrange corporate marriages are
optimistic that 2015 broadly will be another strong year like 2014,
even if volumes don't reach the heights of 2007, the best year ever
for M&A.
A confluence of factors is responsible for the surge in
health-care deal making, bankers say. They include President Barack
Obama's Affordable Care Act, which has sent companies scrambling
for tie-ups that will enable them to better cope with changes the
law has triggered, and the need of many drug companies to replenish
product pipelines. Also feeding activity are factors that are
providing ballast for the M&A market broadly, including low
interest rates and a strong stock market, which gives executives
confidence and makes shares offered in transactions more
valuable.
"Inexpensive credit, the importance of scale and the inflection
point caused by the Affordable Care Act are causing companies to
feel like this is the time to strike with a bold step," said
Clifford Stromberg, a partner at law firm Hogan Lovells's
health-care-transactions practice.
So far this year, three of the top seven deals announced
globally involved health-care companies, according to Dealogic.
Real estate was the second-most-active sector, with $106 billion in
announced transactions, followed by technology with $82.3 billion.
Oil and gas, traditionally a major contributor to M&A activity,
registered just $19.1 billion of deals, as the plunge in crude
prices took its toll.
Another factor helping fuel the health-care deal-making boom is
investors, who have in many cases bid up the shares not just of
companies being bought, but of their acquirers, too.
"The market is reacting well to health-care transactions, even
where there is a large premium," said Steven Baronoff, Bank of
America Merrill Lynch's chairman of global M&A.
The significant bidding interest that health-care auctions are
drawing is emboldening more companies to put themselves up for
sale, Mr. Baronoff added.
Salix Pharmaceuticals Ltd. recently ran an auction that turned
into a spirited bidding contest. Valeant Pharmaceuticals
International Inc. outbid rivals in the monthslong process,
agreeing to buy Salix for about $10 billion--and the Canadian drug
company's stock shot up 15% on Feb. 23 on the news. Then, Endo
International PLC in March submitted a higher bid, seeking to break
up the deal even though buying Salix would mean absorbing a $356
million breakup fee. Valeant countered with a new offer of more
than $11 billion, prompting Endo to walk away.
The auction of Pharmacyclics drew heavyweights Johnson &
Johnson and Pfizer Inc., prompting AbbVie to outbid them by roughly
$1 billion to seal the deal, people familiar with the matter
said.
Health care accounted for $425.4 billion, or 12%, of global deal
volume in 2014, making it the most-active sector then, too. Much of
the activity was spurred by so-called specialty-pharmaceutical
companies, which make treatments for rarer ailments, buying foreign
rivals in order to shift to lower-tax jurisdictions. When the
Treasury Department in September cracked down on the deals, known
as inversions, some advisers worried health care's hot streak would
falter.
But that hasn't happened, in part because many companies that
completed inversions before the crackdown--and as a result aren't
subject to it--are now striking deals for U.S. companies they can
absorb into their lower-tax structures. In the Salix auction, three
of the bidders, including Valeant, had inverted or were in the
process of doing so.
"The large 'specialty-pharma' companies are well positioned to
consolidate," said Gregg Lemkau, the co-head of global M&A at
Goldman Sachs Group Inc. "They continue to demonstrate an ability
to acquire effectively, drive out costs and boost earnings
growth."
In terms of mergers work, as of midday Tuesday, Goldman Sachs
and J.P. Morgan Chase & Co. were in a virtual dead heat, with
around $208 billion in announced deals globally across all sectors,
according to Dealogic. Morgan Stanley ranked third, with $162.3
billion. Bank of America and Lazard rounded out the top five
advisers, with $138.2 billion and $122.6 billion in announced
deals, respectively.
Write to Dana Mattioli at dana.mattioli@wsj.com and Dana
Cimilluca at dana.cimilluca@wsj.com
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