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The merger carnage continues to pile up. More than $40 billion in M&A deals came undone in the second quarter, a 150 percent jump in dollar value compared with $16 billion in the first quarter, according to recent data from MergerStat. There appeared to be no overwhelming trends driving these terminations. Most often, mergers were killed by companies unwilling or unable to pay up in a threatening economic environment with a seesawing stock market. Threats of shareholder rebellion hovered over executives’ heads as they canceled deals such as Palm Inc.’s $235.4 million bid for Extended Systems Inc. The number of collapsed deals fell sharply, however, plummeting by 38 percent to 76 in the second quarter from 105 in the first. Why did fewer broken deals add up to billions’ more dollars worth of deal terminations? Simply put: The bigger they are, the harder they fall. Merger terminations in the second quarter featured some very big corporate names, such as HJ Heinz Co., Clorox Co., Compaq Computer Corp., Trans World Airlines Inc. and Royal Dutch/Shell Group. Despite the merger debris, dealmakers remain relatively sanguine about future deals. “By and large, [clients] are asking the same questions they would have in the past, depending on the industry and depending on the type of transaction,” says Frank Aquila, a partner in the mergers and acquisitions group of New York-based law firm Sullivan & Cromwell. One mitigating factor behind the big numbers in the second quarter: The main contributor was Prudential’s ill-fated $24.1 billion bid for American General Corp. Aquila notes that the dollar value of terminations in the second quarter would plummet to $13 billion without the Prudential deal, well below the $25.6 billion in unraveled mergers in the second quarter of 2000. Moreover, the Prudential/American General non-deal doesn’t lead to many conclusions about the state of the merger business. The reason: Prudential’s bid was trumped by AIG’s bid for American General. “What is a cautionary lesson to anyone is that when you decide to sell your company, like American General did, and you put together a transaction you’re comfortable with, you’re leaving yourself open to another company coming along and making a higher bid,” Aquila says. Although Aquila acknowledges that more deals appear to have been “jumped” by third parties — as in Suntrust’s attempt to break up the Wachovia, First Union merger — higher bids from third parties seem to be a recurring trend. Despite the markets, buyers seem willing to jump in and pick off bargains, as was the case in May when Dimension Data Holdings swooped in on Proxicom Inc. with a $427 million offer that pushed aside Compaq Corp.’s $328 million bid. “There’s no particular factor that’s going to increase or decrease the number of transactions like that,” he says. But David Sorkin, a partner in the corporate group at New York-based law firm Simpson Thacher & Bartlett, notes that this year’s second-quarter numbers do show some mildly disconcerting mini-trends. One of them is that 60 percent of the top 10 undone deals were in old-economy industries, including insurance, utilities and airlines. Headline-grabbing merger failures in telecom and technology claimed only 40 percent of the top 10 broken deals. These old-economy deals were also worth a lot more money. The three top utility deals, for instance, were Entergy Corp.’s defunct $5.5 billion merger with FPL Group Inc., Sierra Pacific Resources’ failed $2.1 billion bid for Enron Corp.’s Portland General unit and Royal Dutch/Shell Group’s $2 billion unsuccessful play for Barrett Resources. In contrast, the biggest broken tech deal was Ariba Inc.’s $2.5 billion non-acquisition of Agile Software Corp. The dollar values fall precipitously after that. The next largest terminated tech deal — FreeMarkets Inc.’s attempt to bag Adexa Inc. — came in at only $340.7 million. Sorkin noted that a company’s brand and size don’t guarantee a successful bid. “Yes, it’s true the big companies can afford the best advice,” he says. “But when you have a Sprint/Worldcom, a GE/Honeywell or even an AOL/Time Warner, it’s going to attract scrutiny. There’s a level of scrutiny in these deals [because] regulators are afraid they’re going to miss something.” Aquila predicts that merger terminations will become less frequent in upcoming quarters simply because fewer mergers have been signed this year. Because fewer deals have been struck, fewer deals will fall apart, he surmised. There already has been some evidence of that. There were only 16 broken deals in June, less than any in other month this year. Sorkin adds that despite the fact that the third quarter began with the demise of General Electric Co.’s merger with Honeywell International — a victim of the EU competition authorities — regulatory concerns have diminished for many companies looking to strike deals. They shouldn’t, he warns. “If there’s a lesson over the past year, it’s to take the European regulators more seriously,” he adds. Wall Street, meanwhile, is undoubtedly glad to say good-by to the second quarter. Morgan Stanley took the biggest hit in the inverted league tables, advising on five canceled mergers worth a total of $32 billion. UBS Warburg came in second, with $24.4 billion in five broken deals, and Credit Suisse First Boston advised on four undone mergers worth $17 billion. Notable names got off relatively easy: Goldman, Sachs & Co. had four deals worth only $2 billion falling by the wayside; and Lehman Brothers Inc. saw only one deal collapse, although it was worth $2 billion. Copyright (c)2001 TDD, LLC. All rights reserved.

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