The year started out on a positive note for equity markets. The major US indices had racked up a series of all-time highs on the back of a belief that the trading relationship between the US and China was heading in the right direction, and in January, phase one of the trade agreement was signed. The German DAX 30 also hit record highs in January, the French CAC 40 reached a 12-year high, and the FTSE 100 hit its highest level since July 2019.
From an economic fundamentals point of view, things were sound. The jobless rates in the US and the UK were at multi-decade lows, and the unemployment rate in the eurozone was at its lowest since the credit crisis. Not only were the major western economies in good health, but interest rates were very low too. The Bank of England’s base rate was at 0.75%, the European Central Bank’s rate was 0.0% and the US Federal Reserve’s was 1.75%.
Boohoo snaps up high-street rivals
Mergers and acquisitions (M&A) typically occur when sentiment is bullish and companies are keen to expand. Boohoo, the online fashion house, started off 2020 in a strong position. Its popular brands and low prices appealed to tech-savvy millennial shoppers, who typically wouldn’t have a big budget. When the pandemic turbo-charged the push to online shopping in May, the company posted a 45% jump in revenue.
Not only did Boohoo see a surge in demand because of lockdowns its high-street competitors suffered greatly as their stores – which are costly to operate – were forced to remain closed. Boohoo snapped up Oasis and Warehouse for £5.25m in June. It was a classic case of the new kid on the block taking over well-established brands too slow to adapt.
Cineworld share price plunges as Cineplex deal goes south
Acquiring a company can be a great way to expand, but it doesn’t always go according to plan. In late 2019, Cineworld launched a $2.3bn bid for Cineplex, the largest cinema group in Canada in terms of screens and ticket sales. The London-listed cinema company predicted that it would generate $120m in synergies in 2020 and an additional $130m by the end of 2021.
As we entered 2020, things were progressing nicely. But the pandemic had a horrendous impact on the cinema industry and in June, Cineworld abandoned its takeover just before the Canadian regulator approved the deal. The British company claimed that the target company had suffered a “material adverse effect”, which was denied by Cineplex. Both sides threatened legal action against each another.
Cineworld may have dodged a bullet with respect to Cineplex, but the high levels of debt incurred as a result of its $3.6bn Regal Entertainment deal in 2018 greatly weighed on the Cineworld share price. M&A can be a great way to expand quickly, but companies that bite off more than they can chew can be left in a vulnerable position.
Delivery services flourish as need for takeaway increases
Timing is crucial and while some sectors suffered as a result of the health crisis, others flourished. 2020 has been a boom time for the food delivery business, and there was certainly an appetite for M&A activity.
In April 2020, Just Eat and Takeaway.com had a merger approved – which wedded the two most profitable food delivery platforms in Europe, and two months later, the newly-formed Just Eat Takeaway made a play for Grubhub in a proposed deal worth £5.75bn, that would create the largest food delivery firm in the world outside of China. The Grubhub share price jumped 40%, before its stock was pegged to the Just Eat Takeaway share price.
In August, the UK regulator gave the green light for Amazon to acquire a 16% stake in Deliveroo, and recently, DoorDash listed on the stock market. Its IPO valued the company at $39bn, and after a stunning first day of trading sent the shares soaring, DoorDash's valuation leapt to $71.3bn. The food delivery sector has seen a lot of deals recently, and more will probably take place as we head into 2021.
Regulators continue to clamp down
Just because companies want to go down the M&A route doesn’t necessarily mean that it will go ahead, because it must receive approval from the relevant regulators.
Last week the UK regulator, the Competition and Markets Authority (CMA), said it would launch an in-depth investigation into the planned merger between O2 – owned by Telefonica – and Virgin Media, which is controlled by Liberty Global. The £31.4m deal was agreed in May and the terms state that the two parent companies would own a 50:50 stake in the combined entity.
Telefonica has been looking to offload O2 for a number of years. European regulators blocked a proposed sale to CK Hutchison in 2015, on the grounds it would leave consumers with less choice. Liberty has been retreating from businesses in a bid to focus on a few core markets, so the play suits both parties. BT Group is the biggest broadband provider and is a major player in the mobile sector, but O2-Virgin Media would knock them off top spot in terms of customer base.
The CMA will determine if the planned deal will bring about higher prices for clients or a decline in standards of customer services. BT are understandably nervous about the possible move, but BT got to where it is now by merging with EE in 2016. That deal was worth £16bn and at the time it created the largest fixed-line and mobile business in the UK, as well has having a presence in TV and broadband.
Aviva share price drop leads to divestment
Sometimes M&A activity is brought about because of changes within a sector, where the actions of one or two companies can spur on others to make a move. Aviva, the insurance and life assurance company has recently been disposing of assets in a bid to focus on a few core markets – the UK, Ireland and Canada. In the past three months, it has sold off its operations in Singapore, Italy and Vietnam. The group is looking to dispose of its Spanish business too, as it looks to continue the recover after the drop in the Aviva share price during March’s sell-off.
Change was clearly afoot in the sector. Last month RSA Insurance agreed to be acquired by Canada’s Intact and Denmark’s Tryg for £7.2bn. Intact will snap up RSA’s British, Irish and Canadian assets, so are obviously looking to compete directly with Aviva. Tryg will take over the businesses in Sweden and Norway, so it’s clearly looking to consolidate its power in Scandinavia.
Covid-19 boosts popularity of tech stocks
Tech stocks cleaned up during the pandemic, as businesses not only managed to remain open, but experienced a surge in demand too.
Cloud-computing has become big business in recent years, with Alphabet, Amazon and Microsoft all major players in the sector. Salesforce sells a wide range of applications to companies, and in the latest quarterly update, its core cloud business and cloud services accounted for half of the total $5.15bn revenue.
Slack technologies, the messaging service, is popular with corporations, and in early December, Salesforce agreed to acquire Slack for $27.7bn. The group is looking to broaden its ranges of services but at the same time face off against Microsoft Teams. The Slack share price hit record highs as rumours spread, while the Salesforce share price dropped almost 10% when the deal was announced.
Chip makers across the board have experienced a rise in demand, as smartphones and video games have become extra popular during the pandemic. In September, the US group NVIDIA launched a $40bn takeover for ARM. The UK group is owned by Softbank, who acquired it for $32bn in 2016. The CMA are investigating the deal but there are concerns that NVIDIA will ruin ARM’s business model and make redundancies in the UK. China’s Ministry of Commerce and China’s State Administration for Market Regulation will also have to approve the deal and domestic companies have urged local regulators to block the proposed transaction.
G4S, the security firm, has been at the centre of a bidding war recently. Three months ago, GardaWorld offered an upwardly revised 190p per share, but G4S claimed the offer still “significantly undervalues” the group. Allied Universal was also interested, and a bidding war ensued. GardaWorld put in a final offer of 235p and Allied offered 245p, which was finally accepted. If the Allied approach is successful it would create a company with revenue of approximately $18bn, while last year G4S’s revenue was £7.8bn. Despite GardaWorld previously stating its 235p per share bid was final, the company is still considering its options. With the G4S share price trading above Allied’s 245p offer, traders may be expecting GardaWorld to come back to the table.
Pharma stocks in the spotlight
The pandemic thrust the pharma sector to centre stage this year. M&A is all too common in the industry as developing new drugs is costly in term of financing and time, so companies often go down the route of buying out rivals.
AstraZeneca, heavily involved in the race for a Covid-19 vaccine, recently agreed to take over Alexion Pharmaceuticals, a big player in immunology and rare-disease medicines, for $39bn. The AstraZeneca share price came under pressure on the back of the news, after it offered Alexion $175 per share, which represents a 45% premium. Traders generally like takeovers that are financially prudent, but punish you if a firm pays over the odds.
Even though the pharma sector has been interesting this year in terms of deals, the largest transition is the $44bn proposed merger between S&P Global and IHS Markit. If the deal gets the go ahead from regulators, the combined organisation will be better equipped to compete with Bloomberg in the area of financial information. The proposed tie-up is likely to come under major scrutiny from regulators – but there are hopes it will be signed off by the European Commission before mid-January 2021.
A busy year for M&A, despite hurdles
M&A activity has been strong in 2020, all things considered. There was so much uncertainty between March and May, that most companies took a cautious stance. M&A activity in Europe has reached $1.1tn so far in 2020, down on the $1.3tn registered last year. In the US, $2.1tn worth of deals have been completed, versus last year’s $2.6tn.
In the past few weeks, there has been great progress with respect to vaccines and that has been also been a factor in the positive move in stocks. The bullish run in equities, and the perception that interest rates are going to remain very low for several years, should pave the way for further M&A activity. The pandemic has separated the wheat from the chaff and companies that are emerging from the crisis in good shape are likely to want to take advantage of the bargains that are available.