Mondays have long been a favorite day for chief executives to announce takeovers, after tying up loose ends in weekend negotiations. But what happened this week was exceptional by any measure.
More than $60 billion worth of deals were announced in less than 24 hours, with a lopsided number of them involving European companies taking over U.S. peers.
The biggest occurred stateside with Charles Schwab’s $26 billion all-share deal to buy rival broker TD Ameritrade. Meanwhile, the world’s biggest luxury goods firm, LVMH of France, paid $16.2 billion to snap up one of the most famous names in jewelry, Tiffany.
Swiss pharmaceutical company Novartis is paying $9.7 billion for U.S. biotech The Medicines Co., coveting its heart drug inclisiran, while a consortium led by Japan’s Mitsubishi agreed to pay $4.5 billion for Dutch energy firm Eneco. Not to be outdone, EBay sold its StubHub ticketing subsidiary to Swiss-based Viagogo for $4.05 billion.
The burst of takeover activity helped drive U.S. markets to close at record highs on Monday, and continue that winning streak into Tuesday.
Cheap debt, soaring equities
Many of the deals were driven by specific factors—LVMH chief executive Bernard Arnault has had his eye on Tiffany for years, and Charles Schwab is creating a giant in a brokerage industry shaken up by the trend to scrap commissions for trades—and CEOs may have wanted to get the deals wrapped up by Thanksgiving.
The deal flow shows that the factors that have driven the strong M&A market for the last few years remain unshakable: high stock prices after a decade-long bull market give CEOs a strong takeover currency. Meanwhile, very low interest rates (negative in Europe) make it cheap to finance acquisitions with loans.
LVMH is financing its takeover of Tiffany with bonds, at an interest rate that is reported to be less than 1%.
Eamon Brabazon, Bank of America’s co-head of M&A for Europe, Middle East and Africa, said this week’s deals could mark the start of a trend of more European companies making acquisitions in the U.S.
“There has been somewhat of a recent imbalance in transatlantic M&A activity with more U.S. into Europe over the last few years. The dollar has been strong, confidence has been possibly higher in the U.S., so there has been a more expansionist approach to M&A. Europe came out of the financial crisis a bit later than the U.S. but confidence is building. We can see that manifesting via a step-up in intra-European M&A along with an increasing trend of significant European deals into the U.S. ,” he told Fortune.
He said he expected M&A activity in Europe, subdued this year, to strengthen next year. “Confidence is solid, capital is readily available and valuations are high. We’ve had a relative lack of large deals in Europe this year. When you put all that on the dashboard, coupled with the assumption that those fundamentals remain for next year—and everything we know to date says that will be the case—you see some year-on-year M&A volume escalation in 2020 from a European perspective, of low single digits.”
Europe’s big bang belies a slow year
Despite the big bang to start the week, data from U.S.-based financial data company PitchBook shows that, globally, mergers and acquisitions are running well behind last year’s levels. Mergers completed so far this year are worth around $2.85 trillion compared with the 2018 full-year total of $4.27 trillion.
PitchBook’s lead private equity analyst Dylan Cox said the recent flurry of mergers was the culmination of a long-term trend, rather than anything particular to this week. “We are in an environment where it is hard to find economic growth, but capital is readily available and so companies are looking to acquisitions in order to find that growth. There are three main ways to finance an acquisition and that is with debt, equity, or cash, and all three of those are readily available,” he told Fortune.
“With debt, you’ve got interest rates that have been very low now for the past decade and continue to remain so, and some cases negative in Europe. With equities, we’ve had a 10-year bull market in most equity markets, particularly here in the U.S., so if you’re a publicly traded acquirer that makes your stock more valuable to go out and pursue all-stock acquisitions,” Cox said.
“Private equity funds have raised more and more cash—what we refer to as dry powder—that they are then able to combine with other forms of financing, most notably cheap debt financing, to really push up these M&A numbers. I view it more as a capital markets story as opposed to this being one particular point in the cycle where we are seeing so much activity,” he said.
He added he expects full-year data to show that M&A activity in the U.S. is higher this year than last, although it is expected to be lower in Europe, where there’s been something of an M&A slowdown this year.
U.S.-China trade tensions have reduced Chinese takeovers of U.S. firms, while Brexit has put something of a damper on M&A activity in the U.K.
Meanwhile, large mergers are not always a positive. Some studies have shown that many mergers end up destroying some shareholder wealth. A flurry of merger activity can also point to a market’s top.
So perhaps companies should avoid getting too carried away by animal spirits.
This story has been updated to include comments in paragraphs 9, 10 and 11 from Bank of America’s Eamon Brabazon on the European M&A outlook in the year ahead.
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