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Last year’s mergers and acquisitions business was good — very good. And if interest rates and the stock market continue to play along, 2005 is expected to bring even more work for the law firms that handle the deals. With a 47 percent jump in domestic mergers and acquisitions volume, up to an impressive $834 billion, last year demonstrated major increases in telecommunications deals, energy and power transactions, health care mergers and media and entertainment agreements. Mergers in the financial sector also topped 2003 numbers, as did real estate, high technology and retail deals, according to Thomson Financial. The strong showing, coupled with apparently fewer antitrust impediments, bode well for 2005, say experts. They anticipate even more activity in private equity midmarket deals and in technology and health care sectors. If January is any indication, merger activity this year could be a record breaker. In the first month of 2005, SBC Communications Inc. announced it was acquiring AT&T Corp. for $16 billion; MetLife Inc. agreed to acquire Citigroup’s Travelers Life & Annuity unit for $11.5 billion; and Procter & Gamble Co. and Gillette Co. announced their intent to merge in a deal valued at $57 billion. “What’s been missing from this market is CEO confidence,” said Dennis Block, who represents Procter & Gamble in its acquisition of Gillette. He is a partner with Cadwalader, Wickersham & Taft of New York. Davis, Polk & Wardwell attorney George Bason Jr. represents Gillette. Block said corporate scandals and concerns about Sarbanes-Oxley compliance contributed to merger declines in recent years. Now, however, more businesses are willing to face their fears as the market improves and their businesses expand. Increases in mergers and acquisitions work “across the board” are likely for this year, said Morton Pierce, head of Dewey Ballantine’s mergers and acquisitions group. He added that health care, energy, technology and media and entertainment will remain strong. Dewey Ballantine handled nearly $100 billion in deals last year, an increase of almost 16 percent compared with 2003. One of the firm’s biggest deals was Wachovia Corp.’s acquisition of SouthTrust Corp., valued at $14.3 billion. “All the ingredients are there for a strong M&A market,” Pierce said. He attributed 2004′s good fortune to the economy’s rebound from recession amid attractive interest rates and stable stock prices. Robust merger activity should come as “no surprise” in such an environment, he said. Last year’s figures showed the financial sector spurring the most activity, with transactions valued at more than $155 billion, compared with 2003, when merger deals totaled almost $150 billion. A huge jump occurred last year in telecommunications, the second-biggest sector, with deals nearing $120 billion, compared with just above $30 billion in 2003. Energy and power deals also brought big gains last year, with those transactions totaling $100 billion, up about 100 percent from the previous year. Health care deals amounted to $93 billion, up from $73 billion in 2003. The two sectors to drop in 2004 were industrials, down to $38 billion from $46 billion in 2003, and consumer staples, down to $20 billion from $23 billion in 2003. An escalation in the number of deals last year, and the anticipated growth in 2005, are partly the result of a legal climate fostering big mergers, said David Balto, a partner in Robins, Kaplan, Miller & Ciresi’s antitrust group in Washington. A former policy director of the Federal Trade Commission’s bureau of competition, Balto said that a “severe downturn” in antitrust enforcement is making mergers easier. COURT RULINGS LEAD THE WAY He pointed to three significant rulings in 2004 that he said weakened the federal government’s enforcement power against anti-competitive business practices: In September, the U.S. District Court for the Northern District of California threw out an antitrust lawsuit filed by the U.S. Department of Justice against Oracle Corp. ( U.S. v. Oracle, No. C-04-0807). The DOJ and 10 states had argued that Oracle’s hostile bid for smaller rival PeopleSoft would smother competition. But the court found that “unsubstantiated customer apprehensions do not substitute for hard evidence” of antitrust violations. The DOJ is not appealing. A month earlier, the U.S. Circuit Court for the District of Columbia denied a motion by the Federal Trade Commission to block Arch Coal Inc. from buying Triton Coal Co. ( FTC v. Arch Coal, 2004 U.S. Dist. Lexis 15996). Both companies owned and operated Wyoming coal mines. The FTC filed its motion after the U.S. District Court for the District of Columbia denied an injunction sought by the FTC to block the deal. The FTC had asserted that the merger would eliminate competition. But the district court determined that a sufficient number of coal producers would remain after the merger. The FTC is not appealing the decision. Also in September, the U.S. District Court for the Eastern District of Kentucky ruled that Dairy Farmers of America did not have a monopoly on school milk sold in certain parts of Kentucky and Tennessee. ( U.S. v. Dairy Farmers of America, No. C-03-206). The DOJ had asserted that Dairy Farmers’ partial ownership of two former rival milk producers had snuffed out competition for school milk contracts. The court found that Dairy Farmers did not violate antitrust laws since it had given up certain controls over one of the companies. Those rulings, while disappointing to government attorneys, are good news for same-industry businesses looking to combine forces, said Balto. “Companies should look at potential mergers with fresh eyes,” he remarked. MIDMARKET DEALS PREDICTED Some experts are predicting a boost in activity amid smaller, midmarket-sized deals, many of which they say will be financed by private equity funds. “There’s pent-up demand to put that capital to use,” said Scott Falk, a partner in Kirkland & Ellis’ mergers and acquisition group in Chicago. Kirkland & Ellis currently represents Adolph Coors Co. in its bid to buy Molson Inc., a deal valued at $4 billion. Last year, Falk represented Concord EFS, which was acquired by First Data Corp. for almost $7 billion. The firm represents dozens of private equity funds. More investors are moving away from traditional investment vehicles, including the stock market and mutual funds, Falk said, which has increased the availability of money and the competition to find the right acquisition targets. Falk said he expects an increase in competitive auctions for those targets among private equity firms bidding against each other as demand rises for suitable targets. In addition, public companies will increasingly compete with private equity funds for smaller targets, which can make desirable partners for them as well. “Targeted acquisitions of smaller businesses are often preferable because those acquisitions are less risky, easier to integrate and less of a distraction from core operations for management,” he said. The upshot of fewer targets combined with more private equity money to buy them will be an “inch[ing] up” of prices for midmarket targets, said Falk, who characterized the current mergers and acquisitions market as “almost at 1999 levels.” (Falk defined midmarket deals as those in the $100 million to $800 million range.) Gibson Dunn & Crutcher attorney Douglas Smith also anticipates the market’s renewed vitality to continue this year, fueled in large part by the technology sector, where new products and services evolve rapidly. Smith represented PeopleSoft, acquired by Oracle for $10 billion. Over the years, he also helped orchestrate hundreds of public offerings. “In newly emerging technologies,” he said, “companies are tending to combine in order to be the company that comes out on top when all the shuffling occurs.”

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