In 2021, when inflation was tame, borrowing costs were low, the economy was robust and the bull market in stocks was thriving, the pace of mergers and acquisitions was hot.RALPH ORLOWSKI/Reuters
When stocks are down, bargain hunters get busy. That’s why the recent market turmoil has raised hopes that the number of corporate takeovers will pick up again, rewarding shareholders with attractive bids.
The problem with this optimism? Takeover activity tends to subside when markets are in turmoil.
In 2021, when inflation was tame, borrowing costs were low, the economy was robust and the bull market in stocks was thriving, the pace of mergers and acquisitions was hot.
The S&P 500 gained nearly 27 per cent last year and touched a record high toward the end of December. Canada’s S&P/TSX Composite Index gained nearly 22 per cent over the same period.
Soaring share prices raised some concerns about valuations. Nonetheless, companies happily gobbled up their rivals, often paying hefty premiums that enriched investors.
Dealogic reported that the combined value of global deals last year rose 64 per cent to US$5.9-trillion.
Corporations weren’t the only entities participating in this feeding frenzy. Private equity and special-purpose acquisition companies – or SPACs, which are essentially shell companies designed to take over privately held entities and make them public – were big players as well.
Indeed, SPACs themselves turned red-hot last year. According to Nasdaq, 613 SPAC listings in 2021 raised a combined US$145-billion from investors, up 91 per cent over 2020, underscoring the desire to participate in the double thrill of takeovers and initial public offerings.
Investors on the right side of takeovers often scored quick gains. For targeted companies with strong revenue growth, acquirers paid an average premium of 37 per cent last year, according to JPMorgan Chase & Co.
Canadian Pacific Railway Ltd. CP-T paid a 34-per-cent premium for Kanas City Southern. And Rogers Communications Inc. RCI-B-T agreed to buy Shaw Communications Inc. SJR-B-T at a 70-per-cent premium, to name a couple of recent deals involving Canadian companies that sent share prices soaring.
This year, though, marks an interesting turn. When the S&P 500 fell as much as 24 per cent in the first half of 2022, mergers and acquisitions activity cooled off and SPACs are struggling, even though stock prices and valuations are lower.
According to Bloomberg data, the value of global deals so far this year is US$3.5-trillion, down 25.4 per cent from the same period last year. In Canada, the value of deals has fallen 49.2 per cent from last year.
That’s hardly a disaster, given that last year’s record-breaking activity makes for tough comparisons. According to estimates from the consultancy Bain & Co., this year’s global total could hit US$4.7-trillion, making it the second-best year on record.
But it does raise the question of whether deal makers generally fail to take advantage of cheaper stocks. Recent history suggests that deal-making thrives on bullish market conditions but falls off as stock prices decline.
The number of deals announced in the United States slumped 38 per cent in 2001, during the technology-led market downturn. Similarly, the depths of the financial crisis in 2008 sent deal-making activity down 30 per cent below 2007 levels.
Why aren’t lower share prices a boon to deal-making? Consultancies noted that this year’s activity is being thwarted by higher interest rates, which raise the cost of capital.
“Supply chain issues have mounted while the war in Ukraine and heated geopolitical tensions from U.S.-China relations have accelerated the retreat from globalism and cross-border deals,” Bain said in its recent report on mergers and acquisitions.
Nevertheless, the consultancy believes that strong fundamentals, such as healthy corporate balance sheets and private-equity players flush with cash, will lend support to deal-making.
In particular, a recent report from Bank of Nova Scotia made the case that large global miners are looking for bargains among Canadian base metals producers, whose share prices are well off their recent highs.
But investors hoping to score a quick profit from attractive takeover offers might need the broader market to play along.
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