One opportunity has been seized by big Pharma company, Bristol-Myers Squibb, through its recent acquisition of Inhibitex, a biopharmaceutical company, at a cost of US$2.5 billion. Inhibitex is currently developing a promising new hepatitis C drug, which though currently only in Phase II development has shown great potential. With over 150 million people worldwide suffering from hepatitis C and over 75% of liver disease being attributed to the illness, producing an effective drug to combat or manage the disease is foremost in the mind of the Pharma industry today; and Bristol-Myers Squibb is not alone. Only last November, Gilead Sciences, Inc agreed to pay US$11 billion for Pharmasset, Inc, another company refocusing on the development of further hepatitis C treatments and with Merck, Vertex and Johnson & Johnson also rumoured to be targeting the hepatitis C market, we can see that big Pharma are on the hunt.

Laura Mole, a member of MAB’s Pharmaceutical and Life Sciences Sector team says, “This latest acquisition by Bristol-Myers Squibb is living proof that the industry is changing and big Pharma are almost panic buying in order to build and diversify their portfolios. This is shown by the acquisition of not only market ready products but also drugs still in the development stages. It is clear that with the Patent Cliff threatening, and with Bristol-Myers Squibb itself to fall victim with its soon-to-expire patent protection on blockbuster drug Plavix, any opportunity to grow and protect will be taken. Small/mid sized Pharma had better be ready for the bidding war to come.”

It is no secret that the M&A market has been in the doldrums of late, with acquisition plans being shelved whilst companies establish some stability in their own businesses. However, the recent activity would seem to signal increasing confidence amongst executives which may indicate a thaw in the market. There is still some uncertainty and in such times buyers, looking for a bargain, will be cautious about overpaying whilst sellers, looking for reasonable prices, will be wary of short-changing themselves. Reports in the media are that the recession is easing (or ended) and that things are stabilising. Potential buyers may be concerned that targets will become more expensive if they delay and if M&A really sparks again, this means there will be a premium placed on stocks.

What is clear from the examples above is that we are not presently seeing the return of the private equity firms that fuelled much of the merger mania prior to the credit crunch. The large deals announced recently are strategic, in that they involve one company buying another to make it an integral part of its business. In contrast, many of the pre-credit crunch takeovers involved the buyer taking on mountains of new borrowing to pay for the acquisition which left many companies struggling to make interest payments. The lack of access to loans following the seizure of the credit markets makes the early return of these transactions difficult to envisage.

So what about the BA/Iberia merger? The recession has eroded travel demand and punished airlines to the extent that the global airline industry is set to post total losses for 2009 exceeding $11 billion.  Mergers present the only option available to airlines to execute signifcant rationalisation to combat over capacity and governments (who have strict control or influence over airlines) are realising that, in the long term, access to foreign capital and a more rational use of airline assets through international alliances and mergers, is the way forward.

At present, for some sectors at least, confidence is returning and that big-ticket strategic (but not private equity-backed) mergers and acquisitions are back on the agenda. In other sectors (most notably the airline industry) the final repercussions of the recent disruptions in the world economy have yet to be felt and in those sectors we might see some more mergers of necessity to effect rationalisation. In both cases, increased M&A activity seems inevitable.