eResearch | As corporations across numerous industries continue to assess an uncertain economic future, the M&A environment is diverging between highly impacted companies pulling out of deals, while well positioned companies with large cash balances grab opportunities.
The M&A Leadership Council recently surveyed 50 C-level executives and senior corporate development leaders, in which more than 50% of respondents indicated a temporary pause on current transactions and approximately 14% indicated an immediate stop on all deals.
According to data from BDO Canada, in Q1/2020, M&A activity significantly decreased, with expected continuation of a down trend throughout Q2/2020 due to broad uncertainty in the markets because of the pandemic.
CHART 1: North America Quarterly Mid Market M&A Deal Activity (2008-2020)
However, the M&A environment is significantly different when comparing the current economic crisis to past downturns, as large tech companies today are well padded with hundreds of billions of dollars on their balance sheets.
According to Refinitiv, in H1/2020, tech conglomerates Alphabet Inc. (NASDAQ: GOOGL), Amazon.com, Inc. (NASDQ: AMZN), Apple Inc. (NASDAQ: AAPL), Facebook, Inc. (NASDAQ: FB), and Microsoft Corp. (NASAQ: MSFT) drove M&A activity as they collectively announced 19 new deals.
Completed Deals
Last month, Facebook closed a US$5.7 billion deal for a 9.9% minority stake in Reliance Jio, an Indian telecommunications company, which is a fully owned subsidiary of Reliance Industries Limited (BSE: 500325), the largest publicly traded company in India by market capitalization.
This week, the Competition Commission of India announced a review on Facebook’s acquisition, as the multi-billion-dollar investment involves Facebook becoming the largest minority stakeholder for one of India’s largest telecommunication companies
Last month, Amazon advanced negotiations to acquire Zoox Inc., an autonomous mobility company. Zoox was valued at US$3.2 billion in its last funding round in 2018. Amazon’s main strategy is to implement autonomous deliveries, which could significantly lower operational costs.
Zoox brings over 1,000 employees who have experience from industry leaders including Alphabet, Apple, NVIDIA Corp. (NASDAQ: NVDA), Tesla Inc. (NASDAQ: TSLA), Ferrari NV (BIT: RACE), NASA, and NHTSA.
Thermo Fisher Scientific Inc. (NYSE: TMO), a developer of scientific instruments and software, recently announced a US$11.5 billion acquisition of Qiagen (NYSE: QGEN), a provider of sample and assay technologies for molecular diagnostics.
The acquisition is expected to expand Thermo Fisher’s capabilities in molecular diagnostics to include infectious disease testing, while other life science offerings are expected to receive synergies with Qiagen’s innovative sample preparation and bioinformatics technologies.
Dead Deals
Early this month, Cineworld Group PLC (LON: CINE), an international movie theatre chain, scrapped plans to acquire Cineplex Inc. (TSX: CGX), a Canadian movie theatre chain, for C$2.8 billion, due to claims of breached contracts.
However, Cineplex quickly responded saying there was no legal basis for the deal to be terminated, with expectations to take Cineworld to court for breaching the contract as Cineplex believes Cineworld’s allegations represent buyer’s remorse.
Boeing Co. (NYSE: BA) recently announced the termination of its US$4.2 billion deal with Embraer SA (NVMF: EMBR3), the world’s third largest plane manufacturer, which included 80% of Embraer’s commercial jet business and a 49% stake in a joint venture for the production of military cargo jets.
The deal fell through due to the pandemic severely impacting the airline industry, resulting in both parties engaging in competing arbitration proceedings. Embraer is currently in negotiations for new potential partners from countries including China, India, and Russia.
Simon Property Group Inc. (NYSE: SPG) recently announced the termination of a US$3.6 billion acquisition of Taubman Centers, Inc. (NYSE: TCO), an owner of malls in the U.S., due to the pandemic significantly impacting the retail industry.
This week, Taubman announced it is taking legal action as it argues Simon Property Group was already aware of the risks from the pandemic, which started before the merger agreement.
Deals Expected to Re-engage Post-COVID-19
Alimentation Couche-Tard (TSX: ATD), recently dropped its previously announced US$5.6 billion acquisition of Caltex Australia Ltd. (CTX: AX), Australia’s largest fuel network with over 1,900 service stations.
The decision was made after a six-month due diligence process with strong considerations towards impacts from the pandemic, however, Alimentation Couche-Tard said it continues to see Caltex as a “strong strategic fit” and plans to re-engage once the economy’s future is more visible.
Xerox Holdings Corp. (NYSE: XRX), a U.S. printer maker, recently abandoned a US$35 billion hostile take-over of HP Inc. (NYSE: HPQ), a U.S. computer maker. Xerox announced postponing future merger meetings with HP to focus on current problems due to COVID-19.
Although Xerox still sees synergistic benefits of the acquisition with possibilities of re-engagement after the pandemic subsides. Xerox is likely to wait until HP’s next annual shareholder meeting in 2021.
M&A in 2020
The uncertainties around when the economy will go back to normal, or if this is the new normal, is holding back corporations from taking riskier inorganic growth strategies, especially in highly impacted industries such as tourism and retail.
However, tech conglomerates and other industry leaders who prepared for outlier situations, or with large cash balances, are in a position to continue previous M&A growth strategies, while potentially acquiring companies and assets at a discounted price.
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