Don’t Make a Big Deal out of Big Microsoft, Verizon Deals

by Tom Taulli | September 4, 2013 1:17 pm

What a difference a couple acquisitions can make.

Thanks to Verizon’s (VZ[1]) whopping $130 billion purchase of Vodafone’s (VOD[2]) 45% stake in a wireless joint venture and Microsoft’s (MSFT[3]) $7.2 billion purchase of Nokia’s (NOK[4]) cellphone business and tech licenses, Fortune has declared “M&A activity finally on the rise.” According to Thomson Reuters data[5], global transactions so far in 2013 are now estimated at about $1.55 trillion, up about 1% during the same period in 2012.

Encouraging? Sure. But these recent mega-deals don’t necessarily indicate a return to boom times.

First, let’s look at the Verizon deal. This transaction was something that had enjoyed speculation for roughly a decade — it was always just a matter of finding the right price tag.

The Verizon Wireless price tag likely was shimmied up in part because of Vodafone’s lofty leverage in the situation. But the sudden spike in interest rates also spooked Verizon CEO Lowell McAdam, who pushed into the deal — for $30 billion more than VZ apparently thought it was worth[6] — out of fear that rates would continue to rise, making financing the deal even more onerous.

McAdam might not be alone; there probably are other CEOs thinking hard about pulling the M&A trigger. But consider some important factors.

For instance, the Verizon deal has a $10 billion breakup fee in the event that financing cannot be raised — that’s a sign that the current funding environment may be far from easy. In fact, with Verizon in the market to issue bonds for up to $50 billion, this could crowd out other deals.

Now, it’s also true that this may not be too much of a concern for some companies. After all, corporate America is sitting on more than $1.7 trillion in cash and liquid securities[7], so many companies don’t have to worry about interest rates. Case in point: cash-rich Microsoft, which had no such issue striking a deal for Nokia.

Conversely, even companies with big cash hordes might shy away from a return to aggressive dealmaking, considering many CEOs still sport scars from the financial crisis and want to ensure they’re not putting their companies in further jeopardy should America get hit by another recession.

Which brings us to the issue of confidence. The U.S. economic recovery is real, but tepid. Even now, we’re starting to see signs of a slowdown in emerging markets, and amid threats of war in the Middle East, continued volatility in oil prices and looming U.S. budget negotiations … well, it might be pretty easy to say “no” to a high-stakes deal.

Lastly, Wall Street appears to still be skeptical of transformative M&A. VZ shares dropped 3% on news of its deal, while MSFT dropped 4.5% after announcing the Nokia buyout.

In light of all this, it’s hard to make a case that Microsoft and Nokia have just launched a renewed M&A boom across Wall Street. It’s likelier that these are two notable outliers — and that dealmaking will continue to limp along as it has been.

Tom Taulli runs the InvestorPlace blog IPO Playbook[8]. He is also the author of High-Profit IPO Strategies[9]All About Commodities[10] and All About Short Selling[11]. Follow him on Twitter at @ttaulli[12]. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. VZ:
  2. VOD:
  3. MSFT:
  4. NOK:
  5. Thomson Reuters data:
  6. $30 billion more than VZ apparently thought it was worth:
  7. $1.7 trillion in cash and liquid securities:
  8. IPO Playbook:
  9. High-Profit IPO Strategies:
  10. All About Commodities:
  11. All About Short Selling:
  12. @ttaulli:

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