Companies are paying up for dealsJuly 31, 2012: 4:26 PM ET
Premiums on M&A transactions are at an 11-year high.
On Monday, the Mid-Western named Chicago Bridge & Iron Co. (CBI), which is technically based in the Netherlands, but is run out of an office in the suburbs of Houston, agreed to buy rival Baton Rouge-based energy construction company Shaw Group (SHAW) for $46 a share. That was 72% more than the $26.69 Shaw's stock closed at on Friday.
CB&I isn't the only company willing to pay considerably more than market prices. Last week, Chinese company Cnooc (CEO) said it would pay $15.1 billion, or $27.50, for all the outstanding shares of Canadian oil company Nexen (NXY). That was 61% more than where the latter's stock had been valued at before the deal.
And those deals only rank 7th and 9th, respectively, on the list of the highest paid premiums this year. Back in January, Bristol-Myers Squibb (BMY) paid $26 a share to buy biotech company Inhibitex, which was an enormous 163% more than where that stock had been trading, and still ranks as the richest deal of the year.
Buyers typically pay a premium to acquire all the shares of a company. But this year that premium has been larger. According to deal tracker Dealogic, on average, acquirers of publicly trading companies have paid 25% more than where those companies' shares had traded. That's up from 23% in the first seven months of 2011, and it's the highest average premium paid since 2001.
It's not clear why buyers are willing to pay more now. Mergers and acquisitions are usually seen as a bellwether - a sign of how optimistic corporate leaders are on the economy. The pace of deals is up in the past month, but it's still down 16% compared to a year ago. But the fact that companies are willing to pay so much more than market suggests there is more optimism out there than the sluggish pace of deals would indicate.
But the high prices could also reinforce how hard it is to get deals done. M&A professionals say one of the reasons there are so few deals is because buyers and sellers can't agree on prices. And with stock values on average still lower than they were five years ago, corporate executives and shareholders often think their companies are worth considerable more than where shares have been trading. That's forcing acquirers to pay up.
M&A usually has a herd mentality. But today's deals could inspire few copycats. Shares of CB&I, for instance, dropped 14% since the Shaw deal was announced and five of analysts downgraded CB&I citing the deal's high price. That might scare other CEOs away from inking similar deals.
Nonetheless, at least for now, the higher prices are mild good news for M&A bankers, many of which have been facing the biggest drought of their careers. Wall Street firms are paid based on the price of a deal. So higher prices mean individual deals may be more profitable, even if overall fees are down. The biggest winner appears to be Morgan Stanley (MS), which has been on one of the sides of five of the 10 deals with the largest premiums. But on three of those deals, Morgan advised the buyer, not the seller. Credit Suisse has worked four of the deals, each time representing the seller.