Report projects flurry of mergers soon

By Rizza Sta. Ana

Nov 22, 2013 01:53 AM EST

A report published on Barron's said a string of mergers would be expected in certain market segments real soon. The report said that this anticipated merger wave could be charged to the increase of share prices.

According to Dealogic, which provides an optimization platform for investment banks and other financial entities, the dollar amount of deals worldwide during the first three quarters of 2013 rose 17%, although the actual number of deals had been reduced by the same percentage. Despite the drop in the number of deals, companies were observed to have adequate amounts of cash even though companies of stocks included in the Standard & Poor's 500 had slowed down in terms of earnings and revenue growth. This, the Barron's report read, would not provide any cost-cutting or organic growth opportunities for such companies. Potential buyers were also observed to be more confident in their purchases as Europe's economy gradually gains back. The economy in the US was also observed to be improving as well.

A latest survey on mergers and acquisitions by law firm Dykema indicated that more than half of the company executives believed that consolidation deals would rise over the succeeding year. Société Générale conducted a study in September which revealed that the sixth massive wave of mergers and acquisitions was already forming. According to the Barron's report, an increase in consolidation deals was expected to increase, following increase of premiums buyers would be paying their target companies.

The report published in the premier financial magazine in the US illustrated one way to spot companies for potential acquisitions. The report said an indicator was the company's takeover price over its underlying earnings power. The Barron's article named Scripps Networks, Kohl's and Alaska Air as potential targets of buyers in the near future due to their low enterprise value over EBITDA ratios. Enteprise value is the company's value after offsetting cash from its shares and debt. EBITDA is earnings before interest, taxes, depreciation and amortization, which normally ignores noncash charges that might change after a deal has taken place, like tax rates.

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