Weekly Brief: All This Dealmaking Momentum Can’t Last Forever, Can It?

Weekly Brief: All This Dealmaking Momentum Can’t Last Forever, Can It?

about 2 years ago3 mins

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Dealmaking blitzed all records in 2021, and there’s been no let-up so far this year. But all that momentum might be about to run out…

🕰 Recap

  • Global mergers and acquisitions (M&A) activity hit a record high last year
  • And this year’s dealmaking started with a bang when Microsoft announced plans to buy Activision for $69 billion
  • Meanwhile, Nike and Amazon were both reportedly thinking about buying beleaguered fitness firm Peloton
  • But Nvidia was forced to call off its proposed acquisition of ARM after regulators blocked the deal

✍️ Connecting The Dots

Companies struck over 62,000 deals globally last year, worth a record $5.1 trillion. That’s almost a quarter more than in 2020, and included 130 so-called “megadeals” worth more than $5 billion each. And you probably won’t be surprised to hear that a lot of those deals were motivated by companies’ immense demand for technology, as well as for data-driven firms.

Companies merge with and acquire one another for plenty of reasons, but three in particular crop up a lot. First, a company at the forefront of big change within its industry will often want to bolster its business for the long term – and all the better if it takes out a potential competitor. Salesforce’s $28 billion acquisition of Slack fits that bill, as do a host of the software giant’s deals over the years. Second, companies that have been too slow to adapt to industry shifts often team up to stabilize their shaky prospects. You could, for example, argue that Amazon’s $8.5 billion acquisition of movie studio Metro-Goldwyn-Mayer was a defensive move to keep pace with Disney+ and Netflix. And third, a company might want to buy another one whose share price has plummeted – most recently due to the coronavirus pandemic or, in Peloton’s case, the coronavirus recovery.

There’s a big challenge to any proposed deal these days, though: governments are increasingly concerned about the wrong sort of team-ups, particularly in the tech sector where intellectual property could fall into the wrong hands, or a deal that could unfairly reduce consumer choice. Nvidia’s purchase of British chip designer ARM, for example, needed clearance from the European Union, the US, the UK, and China, meaning any number of geopolitical upsets could derail the deal. And lo and behold, it’s just had to be shelved.

🥡 Takeaways

1. The ups and downs of dealmaking.

Most soon-to-be-acquired companies see their stock prices rise after a deal is announced, because the buyer tends to pay over the odds to convince the company’s current investors to sign off on the deal. The buyer’s shares, on the other hand, tend to fall, reflecting both the money they’re spending on the deal and the risk that the acquisition won’t work out. If the shares of the buying company do rise, meanwhile, it could be a ringing endorsement of the company’s overall expansion plan.

2. It’s all fun and games until interest rates rise.

Higher central bank interest rates make it more expensive for a company to borrow money from banks and investors alike, which in turn increases the company’s “hurdle rate” – the amount of value they need to generate from a deal to justify it. And given that interest rates are likely to rise this year, deals that might’ve been given the go-ahead in 2020 mightn’t make the grade this year.

🎯 Also On Our Radar

US inflation hit a 40-year high last week, but the Federal Reserve doesn’t seem particularly keen to raise rates any sooner than expected, or by a more significant margin. It looks like the European Central Bank agrees, with the central bank saying last week that responding too quickly could dent the eurozone’s economic recovery. You should continue to watch both central banks like a hawk: the timing of rate hikes is one of the key things that might bring this year’s M&A to a sudden halt.

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