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- Mergers-and-acquisitions transactions worth over $ 10 billion are surging back after a largely dormant first half of the year.
- Wall Street bankers say an improving global economy and confidence in the regulatory environment are playing a role.
- The looming threat of supercorporations like Amazon has many large companies evaluating whether they can be an endgame winner — and whether they need to strike a deal to get there.
On Thursday, Emerson Electric upped its takeover bid for Rockwell Automation to $ 29 billion — 5% higher than the $ 27.6 billion bid Rockwell rejected last month.
Only days before, Qualcomm rebuffed the $ 130 billion overture by Broadcom in what would be the largest tech tie-up in history.
And rumors that the asset manager Brookfield Property Partners was eyeing up the shopping-mall investor GGP also came to fruition this week in the form of a $ 27.9 billion bid, one of the largest real-estate deals of all time.
Is the megadeal back?
The year started off in a frigid climate for large mergers and acquisitions. Only five M&A transactions valued at north of $ 10 billion were announced in the first half of the year, with a combined transaction value of $ 84 billion, according to data compiled by Thomson Reuters.
But boardrooms of the US’s largest companies have worked up an appetite for megadeals in the back half of 2017. Eight deals or attempted deals valued at more than $ 10 billion apiece — and a combined value of $ 245 billion — were announced from July through early November, already dwarfing the front half of the year with seven weeks to go.
While megadeals are still well off the firecracker pace from recent years, the rebound of late is a sign of increasing confidence in global economic conditions and a favorable regulatory environment. But it also highlights the rapidly dawning realization that technological disruption poses an existential threat even to industry giants.
The specter of a global supercorporation like Amazon, Google, or Walmart entering a new industry at a whim has previously fearsome conglomerates with market capitalizations in the tens of billions feeling rather small and acknowledging that maintaining the status quo is now a risky bet.
Mike Nudelman/Business Insider
“If you’re not acting proactively, aggressively, to evolve your business and change your business, you’re likely falling behind — and that realization is happening at a greater pace,” Chris Ventresca, the global cohead of M&A at JPMorgan, told Business Insider. “Therefore, people are more willing to consider deals that they may not have considered in years past.”
The cool-off
Why did mega-deal making cool off so much at the beginning of the year?
Small M&A activity — deals worth less than $ 10 billion — remained strong, with $ 490 billion across 6,900 transactions, according to Thomson Reuters. That eclipsed small-deal volume in the first half of 2015 and 2016.
It was the large deals that lagged behind.
One explanation for the hesitancy was the nascent administration of President Donald Trump, who had made a habit after his election of tweet-shaming companies that made strategic moves likely to result in fewer jobs for Americans.
How would his regulators respond to large mergers that stood to benefit from synergies and cost cutting?
Such concerns began to ebb by summer. The president’s ability to smack stock prices with a single tweet quickly waned, and his social-media salvos shifted toward focusing on concerns such as the Russia investigation, the healthcare debate, and North Korea’s “Little Rocket Man.”
More important, big deals started to trickle through without arousing attention from the Department of Justice.
In April, the medical-devices company Becton Dickinson bought the surgical-supplies manufacturer C.R. Bard for $ 24.2 billion. In June, Amazon sent tremors through corporate boardrooms when it swooped in to buy Whole Foods for $ 13.6 billion. In July, Discovery Communications announced a $ 14.6 billion takeover of the fellow media company Scripps Networks Interactive.
The consolidations went uncontested, and more followed.
“Over the summer there was a number of big, strategic combinations, and they didn’t seem to meet with a lot of regulatory or political resistance,” Mark McMaster, the vice chairman of investment banking at Lazard, told Business Insider.
“It appears we’re in a regulatory environment where Washington is going to allow pure-play companies to continue to get larger,” he added.
The $ 85 billion merger between AT&T and Time Warner — announced in 2016 before Trump was elected — may be the exception, with regulators suggesting they’d file suit to block the deal. Reports have been mixed about whether the DOJ demanded the sale of Turner Broadcasting, the division that owns CNN.
Samantha Lee/Business Insider
By summer, CEOs also grew more confident that global economies were in sync and robust growth would continue.
With stock markets setting record highs and equity valuations soaring, this helped make the math on mergers more palatable.
Multiples may be elevated, but the premium is more justifiable with an upward-sloping global economy.
“Things that may have felt expensive suddenly feel less expensive when you model in an improving global economy,” said Ventresca of JPMorgan, noting that optimism on this front had improved from even six to nine months ago.
Deals also seem more palatable if a company can tap the low-interest debt markets or use its own inflated equity to finance a deal.
If companies swap shares in a deal, the fact that stock prices are inflated can be neutralized, McMaster noted.
The Amazon effect
Aside from giving investors and business leaders some confidence on the regulatory front, the Amazon takeover of Whole Foods more importantly served as a wake-up call.
Lazard
Grocery stocks plummeted after the deal was announced, and pharmacy stocks took a hit as well.
Even companies with tens of billions of dollars in market capitalization began to confront the possibility that supercorporations like Amazon could wake up on a given day and upend their industry.
This forced firms to frankly assess their deficiencies and evaluate whether they had enough to be an endgame winner in their sector.
That’s why you’re seeing more megadeals that establish a firmer footing within an industry.
That may be why Disney — facing threats from Netflix and Amazon — isn’t certain it can win purely by growing within. The company was reportedly discussing a bid that could be in the neighborhood of $ 40 billion to acquire most of 21st Century Fox earlier this month, which would give the company a major leg up. And CVS Health’s reported $ 66 billion takeover plans for Aetna have everything to do with staying one step ahead of Amazon.
“Companies are feeling the pressure of creating endgame winners within their various sectors and are willing to take a longer-term view of whether they have the pieces of the puzzle to be that endgame winner,” Ventresca said. “And they’re acknowledging that if they don’t, they might not have the luxury of time and building it on an organic, greenfield basis.”
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