The Merger Wave Recedes
The first quarter has come to an end, and what it revealed is that the merger cycle is returning to less-frenzied levels. But hold that yawn because it's not all a bore: Some interesting new trends are afoot.
For starters, it's the first time in at least 20 years that financial acquirers (e.g. private equity firms) are both making larger purchases and paying larger premiums on average than strategic acquirers (companies buying companies) are. 1 This could tell us a lot about the direction in which M&A is heading. Even amid turmoil in the high-yield debt market, buyout shops are finding a way to spend some of that dry powder they've amassed. And the lumpy equity market is helping them discover opportunities as strategic mergers cool off a tad.
Take Apollo Global Management, which is leading the way for LBOs this year. The private equity firm agreed in February to buy Apollo Education Group (no relation) for a price 30 percent higher than the stock's 20-day trading average. A week later, it also announced a $12.3 billion acquisition of ADT Corp., which was equal to a 50 percent premium to ADT shares and even caused a short squeeze. Then in March, Apollo said it was purchasing grocer Fresh Market for about $1.3 billion, paying a 23 percent stock premium. Buyouts are back?
While it's not shaping up to be the blockbuster year 2015 was, China is making it a more interesting one. The Asian nation has emerged as a big player in cross-border dealmaking, striking the year's largest acquisition so far (Swiss pesticide producer Syngenta for $46 billion) and trying to play the interloper in other large transactions -- some more successfully than others. Whether this continues may depend on the response they get from CFIUS, America's obscure and unpredictable foreign-deal inspection agency, and their willingness (or ability) to put their money where their mouth is. Regardless, some of these Chinese corporations are essentially causing a revaluing of assets in play, such as Starwood Hotels, which saw its multiple of enterprise value to Ebitda climb some 25 percent since Chinese insurer Anbang began a bidding war with Marriott. (On Thursday, Anbang ended up bowing out.)
Also of note was the decent amount of large deals that still managed to get struck in the quarter, even as overall volume declined and markets bumped around. These include tie-ups between industrial titans Tyco and Johnson Controls, drugmakers Shire and Baxalta, trading houses Deutsche Boerse and the London Stock Exchange and fuel transporters TransCanada and Columbia Pipeline. We even had a real "Merger Monday" last week, when investors digested the news of some $28 billion in mergers, led by paint company Sherwin-Williams' deal for Valspar and the announced combination of data providers Markit and IHS.
So it's been a busy enough start to the year, if not gangbusters. And here's one other thing to keep in mind: A good chunk of last year's mergers haven't even closed yet:
Time Warner Cable, whose plan to sell to Comcast was blocked by regulators, is still awaiting approval for its $79 billion deal with Charter Communications that was announced in May. Anheuser-Busch InBev and SABMiller are going through the same thing for their $120 billion beer merger (and Gadfly's Chris Hughes notes that 'Brexit' could further complicate things). There are dozens of others in a regulatory logjam, but perhaps the messiest of all has been Halliburton's deal for its oil-services rival Baker Hughes. What a tough slog they've had.
Next year and the year after will be the ones to look forward to. That's when many of these gargantuan combinations -- the ones that make it out of the approvals stage -- will begin to be put to the test.
--Rani Molla contributed graphics to this column.
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