Insurance, consumer sectors may see more M&A

A wave of mergers and acquisitions has swept through most of the stock market this year, but a few calm inlets have yet to be disturbed.

By ALISTAIR BARR, MARKETWATCH
MarketWatch: In-depth global business coverage A wave of mergers and acquisitions has swept through most of the stock market this year, but a few calm inlets have yet to be disturbed. Investors still looking to capitalize on the trend may want to look at insurance and consumer-related stocks, which could be the next sectors to get an M&A boost, experts said last week. Several huge deals were announced last Monday, making it one of the busiest M&A days of what was already a blockbuster year for transactions. Equity Office Properties Trust agreed to be acquired by private-equity firm Blackstone Group in the biggest deal ever for real estate investment trusts and the largest buyout in history. Freeport-McMoRan Copper & Gold agreed to buy Phelps Dodge for $25.9 billion to forge the world's biggest publicly traded copper miner. So far this year, there have been more than $3 trillion worth of deals, ahead of last year's $2.7 trillion. Roughly half of the value of M&A transactions this year has been in the financial-services, energy and power, materials and real estate industries, according to Thomson Financial data. But the insurance industry and consumer-oriented businesses haven't been so active. There's been $61.8b. worth of deals in the insurance sector so far this year, below the $74.4b. in 2005 and almost $100b. in 2000, according to Dealogic. Last year, the consumer products and services sector and the consumer staples industry saw more than $100b. of deals each, Thomson Financial data show. So far this year, transactions worth less than $95b. have been announced in the consumer products and services industry, while $73.7b. of deals have been unveiled in consumer staples, according to Thomson. But that could change soon, according to some experts. "Insurance could be particularly active in 2007," Robert Filek, a partner in the transaction services division of accountancy firm PricewaterhouseCoopers, said. "Insurers have had a good year and they will want put some of their profits to work in acquisitions." There haven't been many big mergers and acquisitions in the insurance industry in recent years, partly because property and casualty companies were hit with expensive hurricane seasons in 2004 and 2005, Filek explained. In 2006, the price of some types of coverage climbed, but there were few big storms, so profits in the industry have been strong. That's sparked concern that insurers will use the extra cash to try to grab market share by cutting prices. But companies could instead use the money to acquire rivals. "They are returning to a stabilization point in their business after a few difficult years and several big loss events," Filek said. "There may be consolidation in the industry." In a Monday research report, Morgan Stanley Chief US Investment Strategist Henry McVey identified several companies that are valued so cheaply that they could be acquisition targets. Four insurers - Allstate Corp., Hartford Financial, Prudential Financial and Torchmark Corp. - made the list of 24 companies. "Whether these stocks become acquisition candidates or not, we do not know," McVey wrote. "However, they appear extremely cheap on our valuation framework, and as such, are worthy of investor attention." Consumer-related companies, such as retailers, furniture, electronics and appliance businesses, could also see more M&A action, according to Vadim Zlotnikov, chief equity strategist at Sanford Bernstein. Generally, M&A occurs in industries that have high stock valuations and are starting to experience a deceleration in organic growth, he noted. "Let's say you have a stock that's priced for earnings growth of 10%, but internally management knows the company can only achieve 7% growth," Zlotnikov explained. "They have two choices: wait for growth to come down to 7% and the stock to drop, or use that expensive currency to make acquisitions." That's what's driven recent M&A activity in financial-services, energy and commodities sectors, he added. Consumer-orientated businesses possess one of the two M&A ingredients - slowing profit growth. But shares of many of the companies in these industries have fallen this year on concern about a possible recession and a slowdown in consumer spending, Zlotnikov said. Still, valuations are so low now that M&A deals could be done purely for financial reasons - rather than because of attractive synergies or cost-cutting opportunities, he added. Zlotnikov declined to identify specific consumer-related companies that could be acquisition targets, but noted that Home Depot has begun buying other businesses to help sustain profit growth. MarketWatch: In-depth global business coverage