There’s a long-running joke among my team’s deals writers and editors that in the corporate world, all roads eventually lead to mergers.
Whatever is happening on the outside or on Wall Street — economic downturns, upturns, elections, currency fluctuations, CEO departures, CEO arrivals, good earnings, bad earnings, you name it — the case can somehow always be made, almost comically, that it’s an impetus for more corporate tie-ups. Warren Buffett would say that’s thanks to all the fee-hungry bankers playing to CEOs’ vain propensity for empire-building. Others say it’s the animal spirits at work.
Whatever the case, the global pandemic is giving businesses plenty of reasons to get back to dealmaking. Yes, even social distancing may draw some companies closer together. How they do it will just require a bit more ingenuity in a post-handshake, post-Covid-19 world.
As drugmakers race to develop vaccines and treatments for the virus, the pharmaceutical industry is an obvious place to expect renewed M&A activity. Already, drug giant AstraZeneca Plc has made a preliminary takeover approach to Gilead Sciences Inc., Bloomberg News reported Sunday, citing people familiar with the matter. That’s a potential $100 billion transaction. Executives from Johnson & Johnson also said in April that one of their top priorities is finding M&A that enhances its pipeline, citing the drugmaker’s financial strength. The company has $18 billion of cash and equivalents, and Ebitda exceeds debt.
It was the pharma industry that kicked off the global megamerger wave last time around, in early 2014, as companies including AstraZeneca participated in a game of merger musical chairs. Soon enough, just about every industry had joined the deal frenzy, which lasted until earlier this year. It might have kept going had the virus not arrived.
M&A globally is down 50% this year after the coronavirus quite literally brought the economy to a halt. But stay-at-home orders have been lifting across Asia, Europe and the U.S. And now that New York City — the unofficial headquarters of the M&A market — is beginning to reopen, deals that were in the works previously may pick up where they left off. Those are “low-hanging fruit” for bankers to try to get done, said Eric Becker, who manages the AltShares Merger Arbitrage ETF at Water Island Capital, a firm with $2.5 billion under management. “Those were situations where they were still able to hit the golf course and have the handshakes and look at each other face to face.”
The M&A handshake may be over, but tech-savvy companies are already embracing the deal-by-video-chat method. Verizon Communications Inc. acquired videoconferencing business BlueJeans Networks for about $400 million in April, and though those talks began last year, the deal had to be finalized over BlueJeans video calls. Intel Corp. also bought Moovit Inc., an Israeli public-transit mapping startup, for $900 million last month. Moovit’s CEO told one publication that the deal came together over Zoom video calls.
Not only could more companies use videoconferencing tools to do M&A, other tech-affiliated companies could copy Verizon by acquiring a service like BlueJeans to round out their business software offerings. That’s if working from home is going to be more common even after Covid-19 gets under control. And for deals in which physical assets and property are key, investors have cited the prospect of drones being used to conduct due diligence and avoid unnecessary travel and virus risks. Whether that’s a practical solution remains to be seen.
Companies that announced deals just before the virus struck may experience buyer’s remorse. Tiffany & Co.’s acquirer, LVMH Moet Hennessy Louis Vuitton SE, is reportedly looking to pay a lower price than the $16.2 billion it offered in November, but Tiffany, of course, doesn’t want to renegotiate the terms. The spread between Tiffany’s share price and LVMH’s bid is wide at 10%, signaling investor apprehension that the deal will collapse.
But then there are deals that make all the more sense because of the crisis. Uber Technologies Inc. is trying to acquire Grubhub Inc. to consolidate the market for food-delivery services as demand surges. Even as restaurants reopen, diners in heavily populated areas may still be reluctant to eat out. Becker also cited an ongoing trend of regional bank acquisitions, as smaller banks require better online capabilities and larger banks seek a deeper community presence.
Vulnerable companies may already be bracing for activist shareholder interventions and unsolicited bids. The law firm K&L Gates LLP said that between March and mid-April more than two dozen U.S. public companies adopted so-called poison pills — more than the total number of S&P 500 companies that had these types of takeover protections in place last year. Private equity firms are also likely to be gearing up for buyouts. Such campaigns run the risk of igniting political and public scrutiny in a year marked by soaring unemployment and social activism over inequality.
Other opportunistic buyers may soon come out of the woodwork. Amazon.com Inc., which isn’t a frequent borrower, aroused suspicion when it issued $10 billion of debt in recent weeks. Oracle Corp. also raised $20 billion. “When you start seeing some of these deep-pocketed buyers doing these large debt deals, it makes me think there's pent-up demand for M&A,” Becker said. One caveat: Regulators are ostensibly taking a tougher stance against potentially anti-competitive takeovers by tech giants. Even so, companies that see President Donald Trump losing the November election may want to act before less-merger-friendly Democrats take charge.
There’s also the question of what Warren Buffett will do with Berkshire Hathaway Inc.’s $137 billion of cash. I suggested last week that Costco Wholesale Corp. should be its next bulk purchase.
Wherever the crisis goes from here, all roads still lead to deals.
Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.
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