Three reasons why a pickup in M&A activity is likely
After a favorable court ruling, Comcast launched a $65 billion bid for 21st Century Fox, thereby kicking off a bidding war eventually won by Disney and opening the door to more M&A.
Comcast – like many other providers – wants to make its subscription service more attractive and help reduce “cord cutting” of traditional TV. Disney has similar ideas, hoping to bolster its content library with Fox’s assets. Disney’s first offer for Fox was bested by Comcast, but they returned with a more aggressive bid to bring the contest to an end.
Media is clearly an area ripe for consolidation, given technological change and evolving consumer preferences. Permitting TV service providers to enter the game means that consolidation will only accelerate, but this isn’t just a technology, media, and telecommunications (TMT) story.
Many industries are likely to see a pickup in M&A:
- Favorable court ruling on anti-trust issues
- Companies flush with cash (strong earnings, repatriation)
- Challenging environment for organic growth (tight labor market)
The catalyst was a ruling
After 20-months, AT&T won one of the biggest anti-trust cases in decades – beating out the Department of Justice. The government elected not to appeal the ruling, opening the door to similar merger activity. Comcast jumped on the opportunity within 24 hours. Other transactions may follow. Smaller companies in particular may begin to feel the need to find strategic partners to make themselves more competitive. Expect the pressure to build.
Lots of cash
Booming revenues, lowered corporate tax rates, and repatriation of overseas earnings means one thing: lots of available cash on hand. Companies can allocate that cash in many ways: by shoring up its balance sheet, reinvesting in the business, returning cash to shareholders, or buying other companies. The choice varies from company to company and is likely a combination of all four – but our bet is that we see a continued pick up in M&A.
Low hanging fruit
As the economic expansion ages, organic growth becomes increasingly difficult to achieve. Meanwhile, the cost of labor becomes more expensive, squeezing margins on each additional dollar of revenue. To find new sources of growth, companies may more frequently turn to mergers and acquisitions.
M&A deal premiums spiking
Average deal premium
Source: Bloomberg, as of 6/19/18. An acquisition premium is the difference between the estimated real value of a company and the actual price paid to obtain it. Acquisition premium represents the increased cost of buying a target company during a merger and acquisition. There is no requirement that a company pay a premium for acquiring another company; depending on the situation, it may even get a discount.
Despite high equity market valuations, deal premiums in North America are spiking to levels last seen in 2015 and 2009, when the market was much lower, and companies were willing to pay a premium.
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