Mergers, acquisitions off to hottest start since 2000

Just three weeks into the year, the value of mergers announced totals $152.5 billion. That’s the highest since the $374 billion racked up in the same period during the technology deal frenzy in 2000, according to data compiled by Bloomberg. While clouds loom, bankers say the U.S. corporate tax cut, robust economies and rising stock markets are giving executives confidence to sign off on billion-dollar transactions—and, in some cases, to pay rich prices.

Scher Scher

“We’re in the same Goldilocks environment that contributed to the strong finish to the year for M&A,” said Susie Scher, co-head of Americas financing for Goldman Sachs Group Inc.

So far, it’s been a good year for JPMorgan Chase & Co., which is topping the league table of financial advisers. It’s been involved in almost $42 billion of deals. Goldman Sachs, the usual leader, is ninth. But the year has just begun, of course.

Executives and their financial advisers spent much of last year waiting to see how President Donald Trump’s tax proposals would play out. When the corporate tax legislation was finally agreed on in December, companies cheered the lower rates and reduced levy on bringing foreign earnings back to the United States—potentially to make acquisitions.

“Clarity on tax reform causes companies to be able to make decisions that they perhaps had on hold last year when things were less certain,” Scher said.

North American companies, which fell out of favor among acquirers last year, are back on the shopping list in 2018, making up almost 60 percent of all announced transactions so far, the data show. Dominion Energy Inc.’s acquisition of South Carolina-based Scana Corp. in a deal valued at $14.5 billion, including debt, is the biggest purchase.

In the insurance industry, American International Group Inc. agreed to pay $5.56 billion to purchase British reinsurer Validus Holdings Ltd., its largest stand-alone acquisition in 17 years. And Celgene Corp. made one of its biggest deals ever with the $9 billion acquisition of Juno Therapeutics Inc., placing a costly bet on cutting-edge cancer treatments.

That transaction showed that CEOs aren’t afraid to pay up to get what they want, even with record equity markets pushing valuations higher. Celgene is paying $87 a share for Juno—91 percent above the company’s closing price on the last trading day before reports that the companies were in talks. That’s the third-highest premium for a deal worth $5 billion or more between U.S. companies since 2008.

European targets have been less attractive, accounting for $32.4 billion in mergers so far. But after months of searching for an acquisition, Sanofi finally sealed an agreement on Jan. 22—it’ll acquire hemophilia drugmaker Bioverativ Inc. for $11.6 billion.

“Large corporates have been active thanks to stronger economic growth, well-oriented stock markets and shareholders who are receptive to transformative transactions,” said Guillaume Molinier, a managing director at Lazard Ltd., based in Paris. “The rise of activism has also been, in some occasions, a catalyst for M&A transactions.”

Private equity firms are also set to ramp up deal making, said Jeff Cohen, global head of leveraged finance capital markets at Credit Suisse Group AG.

“I would expect to see some very large transactions this year simply because all the stars have aligned,” Cohen said. “Private equity firms are flush with new capital commitments, they’ve seen some very large amounts of funds raised in the past 12 months, and credit markets are as bold and resilient as we’ve seen in a long time,” he said.

The 2018 acquisitions announced so far could easily be eclipsed if one of the most-anticipated tie-ups goes ahead: Shari Redstone, vice chairwoman of CBS Corp., is once again pushing for a merger with Viacom Inc. to combine the two companies her family controls.

Still, CEOs across industries are closely watching the Justice Department’s effort to block AT&T Inc.’s proposed $85.4 billion takeover of Time Warner Inc. If the lawsuit, scheduled for March 19, is successful, it could deter other executives from pursuing takeovers—especially very large, headline-grabbing ones.

Macro-economic factors could also slow activity, according to Goldman Sachs’ Scher.

“One thing that could cause the music to pause will be a huge correction in the equity markets,” she said. “The other thing is if we start to see signs of accelerating inflation and the Fed begins to move quickly to raise rates.”

The drug industry is expected to be one of the hottest sectors for dealmaking in 2018. Already, a spate of deals have been announced, including biotech giant Celgene’s $7 billion acquisition of Impact Biosciences.

Eli Lilly and Co. CEO David Ricks said at a conference this month that he is looking for deals to advance his strategy of significantly boosting the number of drugs in the Lilly arsenal developed outside the company.

“What we seek to do now is really make external innovation a core part of every step of R&D because we want to work on the most valuable ideas no matter where they come from at all steps,” he said.•

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