Stock Is New Cash for Takeovers as Zappos, Marvel Use ‘Option’

By Zachary R. Mider

Sept. 30 (Bloomberg) -- When it comes to paying for takeovers, stock is the new cash.

Some 36 percent of this year’s acquisitions involved at least some stock, the highest proportion in eight years, data compiled by Bloomberg show. Kraft Foods Inc. and Xerox Corp. are using their shares for proposed takeovers. Zappos.com Inc. and Marvel Entertainment Inc. demanded equity instead of cash when they sold themselves.

In stock transactions, “selling shareholders get an option on an economic recovery,” said Cary Kochman, UBS AG’s Chicago- based co-head of Americas mergers and acquisitions. “It provides buyers with insurance against another downturn.”

Stock deals represent a bigger share of a shrinking M&A market. M&A volume fell 35 percent this year to a $1.6 trillion annual pace, compared with $2.5 trillion last year and $4 trillion in 2007.

Some bankers say a recovery is under way. The affordability of takeovers, as measured by a comparison of cash flow to borrowing costs, will climb to the highest in at least two decades next year, according to data compiled by Bloomberg and Credit Suisse Group AG. The metric has presaged past M&A booms.

“We’re at a rebound point,” said Paul Parker, New York- based head of M&A at Barclays Plc’s Barclays Capital unit. Jeffrey Kaplan, head of M&A, financial sponsors and corporate finance at Bank of America Corp., said technology, health care, and energy and power will be the most active.

Morgan Stanley Leads

Morgan Stanley is advising on about $400 billion of transactions announced this year, the most of any investment bank, followed by Goldman Sachs Group Inc. and JPMorgan Chase & Co., data compiled by Bloomberg show.

Stock deals haven’t played such a big role since 2001, when they made up 46 percent of the market. Comcast Corp. bought AT&T Corp.’s cable-television unit and Hewlett-Packard Co. acquired Compaq Computer Corp. that year, paying in shares.

By 2006 and 2007, private-equity firms dominated M&A, using borrowed cash to fund takeovers. Stock mergers fell to about 20 percent of the market.

This year’s turnaround reflects a fluctuating stock market that has made it more difficult for companies to agree on cash prices. The Standard & Poor’s 500 Index plummeted 27 percent from January to March before jumping 57 percent through yesterday.

‘Insurance Policy’

“One of the reasons people prefer to do stock deals is they perceive that volatility is going to continue,” said John Studzinski, head of Blackstone Group LP’s advisory unit, which is advising Xerox on its $6 billion stock-and-cash takeover of Affiliated Computer Systems Inc. “It’s an insurance policy.”

Credit costs, meantime, are still more than twice the level before the contraction began in mid-2007. Investors demanded companies pay an average yield of 346 basis points more than benchmark rates to issue bonds as of Sept. 28, compared with 132 basis points in June 2007, according to Merrill Lynch & Co.’s broadest measure of investment-grade and high-yield debt. Spreads reached a record 896 basis points in December. A basis point is 0.01 percentage point.

In the biggest unsolicited bid disclosed this year, Kraft, the world’s second-largest foodmaker, is offering about $15.8 billion in shares and cash for British confectioner Cadbury Plc. The stock component reduces the amount of new debt the takeover would require for Kraft, which said it plans to maintain an investment-grade credit rating.

Baker Hughes

Citigroup Inc., one of Kraft’s advisers, predicts market conditions are ripe for an increase in unsolicited or hostile transactions, according to Mark Shafir, who runs M&A at the bank.

Baker Hughes Inc., the Houston-based oilfield-services provider, agreed last month to buy BJ Services Co. for $5.5 billion in shares and cash. Because both firms’ shares are linked to the price of oil and gas, the stock component reduces the risk that a move in commodity prices will reduce the value of the merger to either partner before it’s completed later this year.

“The valuation levels of acquirers’ stocks have increased to the point where they’re comfortable issuing equity as consideration,” said Jeffrey Raich, head of M&A at Moelis & Co., a New York-based boutique.

Zappos.com, the online retailer that agreed in July to sell itself to Amazon.com Inc., and Marvel Entertainment, the comic- book maker that’s merging with Walt Disney Co., both pushed for stock deals when their buyers offered cash, according to regulatory filings describing the negotiations.

Skype-EBay Deal

LBOs have been rare this year. In the biggest in the U.S., a group led by Silver Lake plans to buy the Skype business from EBay Inc. for about $2 billion, a deal that wouldn’t have made the top 20 LBO’s in 2007.

Private equity firms are striking deals with lower leverage and tighter contracts. When Apax Partners LLP agreed in July to buy Bankrate Inc., it didn’t borrow any of the $571 million purchase price and gave Bankrate the right to force the London- based private equity firm to complete the deal.

“Sellers are demanding few and very tight closing conditions, which suggests they lack confidence that the deal will hang together,” said Andrew Nussbaum, a partner at Wachtell, Lipton, Rosen & Katz in New York, the biggest legal adviser to principals in M&A transactions this year.

To contact the reporter on this story: Zachary R. Mider in New York at zmider1@bloomberg.net