Liquidity-laden companies are on a wave of mergers and acquisitions
Firms spent $ 1.74 trillion on mergers and acquisitions involving U.S. companies in the first six months of the year – the highest amount in more than four decades – as CFOs dipped into inexpensive financing options for acquiring technologies, services and other assets.
These deals have grown in value in the first six months of the year, up from $ 511.79 billion in the period last year and $ 1.28 trillion in the first six months of 2019, before the pandemic, according to data provider Refinitiv, which began tracking transactions in 1980. The total number of deals with US participation, at 9,725, was also higher than in comparable periods in 2020 and 2019, Refinitiv said.
U.S. companies are cash rich thanks to last year’s emergency fundraising and strong earnings in recent quarters, providing CFOs with cash to fill gaps in their portfolios. In addition, consumer behavior and market models have changed during the pandemic, forcing companies to accelerate their transformation strategies.
Under pressure to meet high investor expectations, many companies are taking the fastest route to growing their business through acquisitions instead of focusing solely on organic growth. The recent increase comes after deal-making slowed to a trickle last spring after restrictions on coronaviruses took hold, before picking up again later in the fall.
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“The market is clearly hot,” said Luca Zaramella, chief financial officer of snack maker Mondelez International Inc., which agreed in May to spend around $ 2 billion on Chipita SA, a European snack company. Mondelez plans to fund the transaction with new debt, existing cash and $ 1 billion that it received after selling part of its stake in Keurig Dr Pepper Inc.
“The cost of capital is pretty compelling,” Zaramella said. The pandemic has delayed business negotiations. “I feel more comfortable taking the time,” he said.
Companies have made more deals valued at over $ 1 billion than in the period a year earlier and in the first six months of 2019, according to Refinitiv. These operations include Microsoft Repurchase by Corp. of an artificial intelligence company Nuance Communications Inc. for $ 16 billion; AT&T Inc. to merge its WarnerMedia business with Discovery Inc .; and Visa Inc. to acquire Swedish payment provider Tink for $ 2 billion.
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“Accessing capital has probably never been easier,” said Brian Salsberg, global head of integration practice at professional services firm Ernst & Young.
Near-zero interest rates, Federal Reserve monetary stimulus and strong investor demand for corporate debt add to the financial fuel of companies. S&P 500 companies held $ 3.79 trillion in cash and cash equivalents at the end of the first quarter, up from $ 3.03 trillion in the same period last year and $ 2.07 trillion. dollars in 2019, based on the most recent comprehensive data from S&P Global Market Intelligence. .
Well-rated U.S. companies raised $ 817.16 billion in debt in the first six months of the year, up from $ 1.24 trillion the year before, but still up from the first half of 2019, a declared Refinitiv. The money raised from the sale of stocks has also increased.
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The companies mainly paid in cash, but also used stocks, notes and loans, according to Dealogic, another data provider.
Software firm Autodesk Inc., which used existing cash on its balance sheet for two transactions totaling more than $ 1 billion this year, plans to continue investing, said CFO Debbie Clifford.
“The market for cash and fundraising continues to be very strong,” she said. Autodesk made an offer for a third transaction when it tried to buy a software company Altium Ltd. for $ 3.9 billion in June, but the offer was rejected. Ms Clifford declined to comment on the deal.
Traders face high asking prices as high stock markets drive company valuations higher. Multiples for transactions involving U.S. companies, calculated by dividing the median value of the company by earnings before interest, depreciation, amortization, taxes, and depreciation, were multiplied by 17.4 in the first half, from 10.5 times the previous year, according to data analyzed by the consulting firm Bain & Co.
“If you look at historical values, the multiples are definitely up,” said Cameron Hyzer, chief financial officer of business intelligence platform ZoomInfo Technologies Inc., which has entered into three deals since the initial public offering of the company. company in June 2020. “We see more room for mergers and acquisitions,” he added.
Some companies also invest in transactions to achieve their environmental, social and governance objectives. Ford engine Co., as part of a plan to spend $ 30 billion by 2025 on electrification, recently acquired Electriphi Inc., a San Francisco-based fleet charging company for an undisclosed amount.
Online market Etsy Inc. is looking to learn more about the mobile-focused strategies of the London-based shopping app Depop, which it agreed to acquire for $ 1.62 billion in June, although it is not the only reason for the deal. Etsy’s chief financial officer Rachel Glaser said 90% of Depop users are under 26, a large customer group. “We think we got a very good price for this very attractive company,” she said.
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The growth of specialized acquisition companies is also driving an increase in M&A volumes. There are about 500 PSPCs around the world, many of them based in the United States, looking to make deals, according to Refinitiv.
Practitioners expect M&A activity to remain high over the next 12-18 months as companies continue to catch up by using cash reserves and new debt.
Rising interest rates over time could slow the pace of trading, but advisers don’t expect a sudden stop. Federal Reserve officials reported last month that they expect to raise interest rates by the end of 2023, earlier than they expected in March.
“You still have a long way to go for this cycle we are in,” said Noah Kornblith, partner at O’Melveny & Myers LLP, which helps clients negotiate mergers and acquisitions.