Deal Pace Expected to Persist Through 2011

(M&A deal story updated with further commentary.)

NEW YORK ( TheStreet) -- In the business of M&A, it's a seller's market.

The pace of dealmaking in the United States has accelerated over the last 12 months -- including a flurry of activity just announced on Monday.

The conditions that have fueled this resurgence look to remain in place for the rest of 2011, according to some experts. That's because the gasoline driving the deals is cheap debt. Both companies (often referred to as "strategic buyers" in the deal business) as well as private-equity firms have seen credit markets loosen to a degree not seen since the beginning of the last boom.

With the Federal Reserve holding interest rates at zero, the yields on U.S. Treasuries are below normal, persuading institutional investors to seek returns elsewhere, including in the high-yield and bank debt markets. Investor demand has, in turn, made it easier for buyers to find financing for their transactions at attractive interest rates.

Because of demand, junk-bond investors and banks are "very receptive to putting money into play," says Tim Hartnett, a consultant in the transactions services arm of PwC. "The velocity of the deal market, and how quickly it came back, I think surprised most people."

The number of big transactions in corporate America has picked up in 2011. Since the beginning of the year, 31 U.S. deals worth at least $2 billion have been announced, according to data compiled by Dealogic and Bloomberg. (The total value of those transaction exceeds $200 billion, the biggest being AT&T's ( T) troubled $39 billion offer for Deutsche Telekom's T-Mobile.) That compares to just 17 transactions worth $2 billion or more in the first half of 2010, and 46 such deals in all of last year.

With weak economic data recently sparking fears of a double-dip recession, the Fed will likely keep interests rates low for the foreseeable future. That means corporate and investment buyers will likely remain eager to take advantage of today's window of opportunity by continuing to wheel and deal.

A busy "merger Monday," as the financial media cleverly dubbed it, saw apparel colossus VF Corp. ( VFC) strike a $1.8 billion deal for Timberland ( TBL), the Wendy's Arby's Group ( WEN) unload the fast-food chain that forms the latter half of its name for $430 million, and Honeywell ( HON) agree to buy EMS Technologies ( ELMG) for about half a billion dollars. Then there were the rumors, courtesy of the Sunday Times of London, that commodities juggernaut Glencore was in pursuit of the Kazakhstan miner Eurasian Natural Resources for as much $19.5 billion.

Another factor driving M&A among strategic buyers: Companies have amassed enormous war chests. More than $1.1 trillion in cash now sits on the balance sheets of S&P 500 companies, according to Factset, which PwC cited in a report on 2011 M&A released last week.

The reasons are well-known. After the crisis hit, companies heavily cut costs. As the global economy bottomed out and began its tentative recovery, profits surged as corporations continued to refrain from rebuilding their cost structures. At the same time, the economic recovery has proved slow, patchy and prone to setbacks -- or fears of a setback. It's been tough, in other words, for companies to achieve revenue growth.

One way to solve top-line stagnation: acquiring other companies. "Inorganic growth is growth nonetheless," says Hartnett.

Take, for example, International Paper's ( IP) recent $3.8 billion bid for Temple-Inland> ( TIN). IP's top line has moved between $5 billion and $7 billion per quarter for more than a decade. Now, after buying an Indian paper company for $420 million in March, IP is looking to add Temple-Inland's corrugated cardboard boxes to its lineup. Though IP's romance with its latest target quickly turned hostile after a few days of flirtation, the paper giant said it was able to secure financing from UBS, which is also serving as its adviser on the matter. Analysts say that the interest rate scored by IP will likely be low enough for an acquisition of Temple-Inland (should it succeed) to be immediately accretive to earnings.

The growing intensity of the bidding has driven asset values higher, creating what PwC called in its report last week a "sellers' market." Targets are "in the driver's seat and are demanding a swift diligence process with more certainty around the outcome," said PwC's deal chief, Martyn Curragh, in the report. According to the firm, several sectors are riper than others for deals; those include tech, financials, energy, health care, media and industrial products.

The metric for judging buyout prices is the multiple paid on earnings before interest, taxes, depreciation and amortization. By that measure, International Paper is looking to pay 8 times Temple-Inland's EBITDA. Six months earlier, Rock-Tenn ( RKT) bought Smurfit-Stone for an EBIDTA multiple of 6.

Similarly, VF Corp. is paying about 12 times Timberland's EBITDA, according to Bloomberg. Since 2006, the newswire's data shows that six deals in the apparel sector had average multiple of 9.7.

Meanwhile, the value of the average deal so far in 2011 (involving U.S. publicly traded targets) has risen to more than $1.8 billion, according to data compiled by Dealogic. That's the highest figure since 2006, when the average deal value was $2.1 billion.

-- Written by Scott Eden in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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