Companies Are Merging Left, Right, And Center

Companies Are Merging Left, Right, And Center

over 3 years ago3 mins

Mentioned in story

Mergers and acquisitions have spiked in recent weeks as companies look to take advantage of these unprecedented times.

🕰 Recap

  • In June, luxury giant LVMH began backing away from its $16 billion takeover of Tiffany’s
  • Earlier this month, pharma firm Gilead Sciences agreed to buy biotech Immunomedics for $21 billion
  • Last week, chipmaker Nvidia said it’d buy chip designer ARM in the biggest deal the industry’s ever seen
  • And Spanish banks Caixabank and Bankia just shook elbows on a $17 billion merger

✍️ Connecting The Dots

Companies merge with and acquire one another for plenty of reasons, but there are two in particular that crop up a lot. First, a hot company at the forefront of big changes within its industry will often buy another firm to bolster its business for the long term (and if it takes out a potential competitor, all the better). Back in 2011, for example, Amazon bought DVD rental-cum-film streaming service Lovefilm, which then became Prime Video. Facebook, meanwhile, famously bought Instagram in 2012 for $19 billion in an effort to ward off potential competition. And there are countless other occasions where companies that’ve been too slow to adapt to industry shifts have teamed up to shore up their shaky prospects.

More recently, buyers have been snapping up companies whose share prices have fallen victim to the coronavirus pandemic, or whose owners have been forced into sales that’ll either balance the books (hey, SoftBank) or quell national security concerns (that you, ByteDance?). What a difference a year makes: back in 2019, competition regulators were focused on stopping mergers that’d reduce competition and consumer choice, and subsequently increase the likelihood companies would charge customers unfairly high prices. Now, though, entire governments are looking into proposed deals – particularly in the tech sector, or else let key intellectual property fall into the wrong hands. Just look at Nvidia: the chipmaker needs clearance from the European Union, the US, the UK, and China to complete its $40 billion purchase of ARM – meaning Brexit, ongoing US-China tensions, or any number of other geopolitical upsets could potentially derail the deal.

🥡 Takeaways

Governments’ national security and competition concerns can be cleared up if the company in the spotlight makes certain concessions. They might promise to keep their headquarters and key intel in certain countries, agree to sell off parts of the newly combined business to preserve healthy competition, or make investments that’ll ultimately benefit consumers. But if companies don’t go far enough in their attempts to compromise, governments are left with no option but to can the combo.

The shares of the soon-to-be-acquired company normally rise after the deal is announced: the buyer, after all, tends to pay more for its shares than they were previously worth in order to convince current investors to sell up. The buyer’s shares, on the other hand, tend to fall, reflecting the often-high price paid and the risk that the acquisition won’t work out as hoped. Of course, the shares of the buying company do rise on rare occasions – perhaps reflecting a ringing endorsement of the company’s overall expansion plan.

🎯 Also On Our Radar

Last week Apple announced a few new subscription bundles, as well as a handful of new products. Apple’s “services” segment is twice as profitable as its hardware business, so its future earnings growth depends more on increasing the number of people who pay for them than it does the number of iPhones it sells. Investors, then, will be paying close attention to the success of these new subscriptions.

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