Pickup ahead in food m. & a. activity

by Morton Sosland
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With little merger and acquisition activity of note occurring in food manufacturing so far during the first quarter of 2016, the question may well be asked whether early forecasts of a continued record-setting volume of deal-making will still be realized. After all, 2015 is remembered as the year in which the greatest m. & a. activity occurred, in both food and in consumer products, and early conditions affecting this year appeared to be much the same as last year. Yes, there are a few notable changes that might cause some caution, but most forecasts by investment bankers are confident that 2016 will see near repeat of the $1 trillion spent by consumer companies on acquisitions last year. That spending, on food, beverage and pharmaceutical companies, accounted for the largest share of the $3.8 trillion paid out in mergers and acquisitions in 2015.

Most notable among changes occurring this year is the Federal Reserve action in raising its loan rate to banks by 0.25% along with the expectation that additional increases will occur this year. Yet, borrowing rates, with an upturn of as much as a full percentage point, remain highly attractive. That increase would mean borrowing at less than half what it cost in 2007, the prior year of m. & a. activity approaching the 2015 peak. Any brake that interest rate increases impose would be more psychological than practical, considering the huge amounts of cash held by corporations in America and Europe. A negative vote in the United Kingdom later this year on continued membership in the European Union could interrupt corporate deal-making.

Many of the optimistic forecasts were driven by two considerations. One is that acquisitions offer the easiest route to increasing revenues in tough markets. Not only is revenue growth an important sign of corporate success but a revenue uptrend generally help improve profit margins, a measure of management skill. Another major influence is the healthy state of most corporate balance sheets, reflected in the peak cash holdings as well as cautious borrowing during recent years of global economic uncertainty. Both of these factors gain in importance as so-called activist investors are willing to take on much larger companies than ever before, in turn often pressing for m. & a. steps either to buy or be purchased. Activist pressures have prompted a few “going private” transactions as alternatives to m. & a. involving cash or stock exchanges.

Increasing attention is focused on the expansion of private equity funds established solely to buy food companies in specific regions or parts of the world. Hundreds of millions have been assembled by private equity managers claiming knowledge about the most likely candidates for purchase in the food industry as well as how best to manage.

In focusing on the financial factors behind what still is likely to unfold in the food business, sight must not be lost of the once favorite reason given for such transactions — to diversify beyond food a company’s product line. Industry history includes examples of misguided mergers that made once proud food companies into businesses that could hardly be recognized as having a role in food. The industry should be thankful that most of the drive to create totally different businesses has vanished.

The one certainty about what lies ahead for the food industry is the unpredictability of what companies will be the takeover targets and which will be the aggressors. In the past year, considerable activity saw smaller companies turning out to be the buyer. Indeed, recent m. & a. activity in food is marked by surprises along this line. While good, as well as conventional, business sense points to acquisition targets made up of smaller entrepreneurial companies pursuing an especially attractive part of the fast changing consumer food market, the financial climate does not preclude these smaller companies from going after companies of a size that at one time would have been unthinkable.

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