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M&A Slowdown?

Experts see continued mergers and acquisitions, but headwinds may slow things down, change prices


The same uncertainty that has tested the stock market in recent weeks could rattle the mergers and acquisitions world in coming months, experts say. 

But they add that the merger and acquisition mania will continue.

It’s certainly been an interesting year as the maturing merger of Dow and DuPont spawned three spinoff companies this year and turned the green-loving ag giant Pioneer into a piece of Corteva Agriscience. The reasonably fresh signs along Northwest 62nd Avenue in Johnston, home to Pioneer’s sprawling campus, were quickly replaced with signs to reflect the Corteva branding.

In a major acquisition, New York-based GateHouse, part of the renowned cost-cutter New Media Investment Group, recently announced it will buy Virginia-based Gannett — owner of the Des Moines Register and the Iowa City Press-Citizen. That would form one of the largest media empires in the United States, and likely would mean additional layoffs and other cost reductions. 

We asked three merger and acquisition authorities to assess what kind of year it has been, and what we should expect in the next 12 months. Included were Brian Bergstrom of Shuttleworth & Ingersoll law firm in Cedar Rapids, Manjot-Singh Bhussar, assistant professor of management at Iowa State University, and Rick Neumann of Nyemaster Goode law firm in Des Moines. 

How would you describe the merger and acquisition activity this year? Has it been an active year, historically? Why or why not?
Bergstrom: 2019 has been and continues to be a very active year from our perspective in terms of private M&A. In fact, the last few years have been very active, and that trend has continued in 2019. I attribute that to the following:
1. For sellers, valuation multiples remain strong by historical standards.
2. There still are many sellers who are interested in a liquidity event due to generational transitions or in order to monetize recent growth or to diversify personal wealth.
3. Both strategic and financial buyers are plentiful and remain well-capitalized.
4. Buyers continue to have access to reasonably priced bank financing for desired leverage. 

Bhussar: The global M&A activity has been on the rise over the past few years, and the trends look similar in this year as well. The number of deals, the pace, has reduced, however. But the value of the deals [13 megadeals of greater than $10 billion value in the last two years] has been larger as compared to previous years. 

The value of deals in Q1 2019 is very similar to that of Q1 2018 at $414 billion. 2018 and 2019 have seen 13 megadeals of more than $10 billion in value each. 2018 alone saw companies undertake 36 megadeals comprising a total value of $950 billion that represented 38% of market activity for last year. 

Part of the reduction in pace is due to global economic and political uncertainty but it has not affected sectors such as pharma and financial services, probably due to their less dependence on China and/or foreign trade. Additionally, pharma and defense industry have been witnessing consolidation activity among the major players.

Neumann: It has been an active year for me and my firm and our clients in M&A, locally, nationally and internationally. For us, it has included our own backyard in Central Iowa as well as other states and the Middle East. My sense is that a significant amount of deal activity continues for others as well, which follows from good earnings, available equity, low interest rates and strategic need.

What do you see as some of the key transactions this year?
Bhussar: Major transactions are happening in pharma, energy, media and defense sectors. Some notable deals from 2018-19 include:

– $85 billion, AT&T’s acquisition of Time Warner.
– $39 billion, Comcast’s acquisition of Sky.
– $69 billion, CVS’s merger with Aetna Health Insurance.
– $52 billion, Cigna’s acquisition of Express Scripts.
– $16 billion, Walmart’s acquisition of Indian e-commerce giant Flipkart.
– $30 billion, UTC’s acquisition of Collins Aerospace.
– All-stock deal between UTC and Raytheon Co.
– $47.5 billion, Chevron acquisition of Anadarko Petroleum.

Are there any significant headwinds this year in M&A?
Bergstrom: Tight labor markets can be a challenge for sellers and also for buyers who want to continue expansion and growth.

Bhussar: With increasing economic and political uncertainty in 2019, companies are facing pressures to cut costs, which might even drive possibility of mega-deals in coming months. For example, cost-cutting pressures on pharma and defense sectors have forced major players to join hands that will help them in cutting costs and increasing their bargaining power. Even though the DOJ and FTC have shown signs of opposition to vertical mergers (AT&T’s acquisition of Time Warner), some companies, especially in financial, defense and pharma sectors, have seen positive response from the administration on their consolidation plans. So I would expect the number of deals to go down, especially in technology sector, but more mega deals to follow in other sectors. The reason I expect technology sector to be overly cautious is because of negative sentiments both from the public and the administration along with uncertainty induced by trade escalations and now because of unrest in Hong Kong, as China has been an integral part of their hardware supply chains.

Neumann: I am responding to this two days after the inverted yield curve sent the stock market down, so yes, volatility, uncertainty, tariffs, China and [Europe Economic Community] slowing, Washington spending, regulation and gridlock and disruptive change in the marketplace all add to the mix in causing buyers to be careful. Nevertheless, deals continue to get done across a wide variety of industries. There is a lot of private equity chasing deals, and strategic buyers have a long-term view looking for product/service expansion, scale and talent. Baby boomers are retiring and are looking for an exit. If you are on the sell side, there are some high multiples getting paid — sometimes. If you are on the buy side, you stress the uncertainty regarding future earnings streams.

What do you expect the next 12 months to bring?
Bergstrom: There is certainly increased talk about the likelihood of a recession or a general pullback in economic activity. Those events generally affect M&A activity, but the extent of the impact varies by industry. Historically low borrowing costs may soften the negative impact.

Bhussar: More large deals, companies being more cautious to political environment not only at home but also abroad.

Neumann: The fast pace of change means business needs to keep up or lose. Acquisitions will continue through the current headwinds and in good times and bad. The pricing may change and some deals will not get done.

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