Record-Breaking Deals

Record-Breaking Deals

about 3 years ago3 mins

Mentioned in story

The third quarter of 2020 set records for mergers and acquisitions (M&A) and this quarter’s on track to do it all over again. This could be the start of something beautiful…

🕰 Recap

  • Back in September, chipmaker Nvidia said it’d buy chip designer ARM in the biggest deal the industry’s ever seen
  • October was busy too, with a $7 billion deal between Coca-Cola bottlers coming alongside multiple other big mergers
  • And in November, there were more takeover deals than in any other month this year

✍️ Connecting The Dots

With the future as uncertain for them as for everyone else, companies froze their dealmaking the moment coronavirus struck: it didn’t make much sense spending cash they’d probably be better off saving, after all. But M&A came roaring back as the path out of the pandemic became clearer, with a record-breaking $1 trillion worth of deals announced in the third quarter, and $760 billion worth of acquisitions so far in this one – the most since 2016.

Companies merge with and acquire one another for plenty of reasons: some might be trying to snag a business hobbled by the pandemic at a bargain price, while others might want to bolster their operations ahead of the pandemic-driven downturn and eventual economic recovery. Some companies might just be following their tried-and-tested strategies of buying up skills they don’t have: that’s arguably what Salesforce and Facebook are doing by buying Slack for $28 billion and customer relationship management firm Kustomer for $1 billion respectively – and what Amazon might be doing if it goes ahead with its $300 million acquisition of podcast network Wondery.

But some economists have one more theory about all these deals: they think company bosses might’ve had more time on their hands in lockdown to come up with new acquisition strategies. And if investors reward one company by buying up its shares, it can put pressure on others to follow suit. That so-called “corporate imperative” could encourage CEOs to try to outdo each other with bigger and bigger deals.

🥡 Takeaways

1. Share prices move predictably after M&A... unless they don’t.

Shares of a soon-to-be-acquired company normally rise after a deal’s announced: the buyer, after all, tends to pay more for its shares than they were previously worth 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. On the rare occasion that the shares of the buying company rise, of course, it might suggest support for the company’s overall expansion plan from current investors as well as new ones buying in.

2. M&A is usually a bad thing for companies.

If a company that buys another pays over the odds and never recoups that money, shareholders will be the ones to lose out. It’s not always the buyer’s fault, mind you: sometimes an industry changes in unexpected ways and the deal’s proved too expensive in hindsight. And if the targeted boosts in revenue or reductions in duplicate costs (a.k.a. synergies) don’t pan out, investors are left with a less valuable business than they expected over time. That’s especially true of large-scale deals, which might be why consultancy firm McKinsey found that lots of smaller acquisitions over time add the most value.

🎯 Also On Our Radar

OPEC+ – the group of major oil-producing countries and their allies – agreed last week to increase their collective daily output by 500,000 barrels starting next month. They’re essentially betting that the worst of the dip in global economic activity is in the rear-view mirror, and that economic growth – and with it demand for oil – will pick up next year.

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