The US M&A market just got a shot in the arm from the Kroger/Harris Teeter tie-up

July 9, 2013
July 9, 2013

Kroger Co, the largest US grocery store chain, just got even bigger. Kroger agreed to buy its smaller rival, Harris Teeter Supermarkets, in a $2.5 billion deal. It’s the kind of classic M&A transaction that keeps the deals market humming: two companies tying up in a multi-billion-dollar strategic partnership. And it’s the kind of deal that has been a bit scarce this year.

Harris Teeter’s more than 200 stores are in the southeastern and mid-Atlantic parts of the US, in what Kroger calls high-growth markets, vacation destinations and university communities. The combination will create a company that operates more than 2,600 stores, with 368,300 employees.

It’s also the kind of deal which a CEO and board probably see as the closest thing to a no-brainer. The stock of both Harris Teeter and Kroger were up in morning trading, which is interesting because it’s usually only the seller’s stock that goes up in a deal. Kroger investors signaled their approval for the tie-up by sending its stock up by as much as 2.6%.

But such deals are rare these days. Except when the stars align perfectly, CEOs and boards haven’t been confident enough to pull the trigger. There have been a lot of talks, but worries about the global economy, recent volatile markets and now the possibly imminent tapering of monetary stimulus by the US Federal Reserve have caused companies to pause.

That’s why global dealmaking fell below 2009 levels for the first half of this year. In a report, Ernst & Young said those low figures may be here to stay as the new normal for the pace of M&A, as executives stick to playing it safe.

No doubt dealmakers will use investor reaction to the Kroger-Harris Teeter deal as a way to encourage other companies to make a similar move. But if recent trends persist, M&A will remain something that is not for the faint of heart.

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