Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Merger And Acquisition Deals Poised To Be Strong In 2020

By CMC Markets (David Madden)Stock MarketsDec 20, 2019 12:42
uk.investing.com/analysis/merger-and-acquisition-deals-poised-to-be-strong-in-2020-200435719
Merger And Acquisition Deals Poised To Be Strong In 2020
By CMC Markets (David Madden)   |  Dec 20, 2019 12:42
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Investment sentiment was sour at the start of the year as there was a fear the Federal Reserve were going to carry out an aggressive rate hiking cycle, and inadvertently push the US economy into a recession.

Merger and acquisitions (M&A) activity usually flourishes in a bull market as there is an incentive to buy into the market while the tide is rising. Conversely, when the economic outlook is not so hot, and the investor confidence is thought to be in decline, traders tend to trim their exposure to the markets, and the some go for companies.

M&A activity is often funded with debt, and during a bearish run on global stock markets, speculators tend to sniff out companies that are highly geared, which are sometimes ones that overstretched themselves on account of taking over another company. Even if the deal was largely funded through equity, no firm wants to be known as the one that has bitten off more than they can chew, and has possibly overpaid for the pleasure too.

Companies’ appetite to take on more risk and go on the hunt for possible targets picked up in the latter half of 2019 as investment sentiment had ticked up, as it became clear the Fed were not going to go down the rate hiking route. In fact the sentiment went in the opposite direction, and the US central bank ended up cutting rates in June. Other central banks around the world had moved to a more dovish stance too, hence stock markets strong performance, and when that kicked in, the M&A deals started to tick up too.

Merging with another group or buying out a firm can offer many advantages. It can be a good way to expand into different aspects of the business or into different geographical regions. Sometimes M&A activity is pursued as a way of securing supplies or fending off competition. One of the main reasons for firms to enter into a tie-up, is for economies of scale, and to be able to take advantage of synergies.

The auto sector has come under increasing pressure on account of a slowdown in global demand, China in particular, while the growth of the electric car industry is challenging well-established brands. The changes in the sector promoted PSA, the owner of Peugeot (PA:PEUP), to enter into merger talks with Fiat Chrysler (MI:FCHA). The deal has been confirmed, but it will be subject to regulatory approval. Should the deal get the green light, it would create the fourth-largest auto maker in the world, and cost saving benefit of around €3.7 billion. This is a great example of a synergy motivated merger as the companies need to adapt to the changes in the industry.

Recently, Cineworld (LON:CINE) launched a bid to acquire Canada’s Cineplex for C$2.8 billion. The London-listed company is clearly keen to gain exposure to Canada as Cineplex is the largest operator in the country, both in terms of box office sales as well as screens. Cineworld believe the move will generate $130 million worth of synergies by the end of the 2021 financial year. Economies of scale are a nice by-product of a deal, but it needs to be taken in the context of the C$2.8 billion takeover – which will be funded by debt. Keep in mind, Cineworld, acquired Regal Entertainment in the US two years ago for $3.6 billion, and that move was largely funded by debt too. In August, Cineworld revealed a downbeat set of first-half numbers as pro-forma revenue slipped by 11.1%. Financing acquisitions through debt can backfire as interest repayments must be made, and if the move doesn’t go according to plan, you can become trapped the weight of debt.

LVMH (PA:LVMH) is expanding its vast range of luxury brands as it has agreed to acquire Tiffany for over $16 billion. LVMH are known for high-end brands like Dom Perignon and Dior, and now Tiffany will be the latest string to tie bow. The share price of the New-York listed jeweller hit an all-time high in 2018, but has come off the boil since then. The group is finding it tough to appeal to younger generations. The fall in stock price made it a potential target. LVHM acquired Bulgari, the jeweller, in 2011, and since then group has seen gone from strength to strength, so some traders feel the LVMH will put the sparkle back into Tiffany.

M&A activity often sparks others in the industry to throw their hat into the ring too as companies might feel they are missing out on a good deal, or perhaps, they feel they could become vulnerable in the wake of the transaction. Just Eat (LON:JE) are on track to merge with Takeaway Com Holding BV (AS:TKWY) – a deal that is worth £4.8 billion but Prosus have upped their offer for Just Eat to £5.1 billion. Despite the higher offer from Prosus, the board of directors of Just Eat are still advising the shareholders to press ahead with the Taakway.com deal, as it will create a firm that will house the two most profitable online food delivery companies in Europe. This industry has been rife with M&A activity in recent years, and the competition is heating up as Amazon (NASDAQ:AMZN) are hoping to invest in Deliveroo, pending regulatory approval. When it comes to expansion through M&A, the highest offer isn’t always the best, as the companies need to be a good fit, and complement each other, which is why Just Eat are keeping Prosus at arm’s length.

Galliford Try (LON:GFRD) shares took a knock in April when the company issued a profit warning. The construction and civil engineering firm, like many of its direct competitors, was hurt my project overrunning, plus agreeing to contracts that had too thin margins. The tough competition in the sector meant it became a race to the bottom in terms of profit margins, which was ultimately costly for the shareholders. In a bid to stream-line its business as well as ramp up its cash position, Galliford decided to spin-off its house building unit, Linden Homes for £1.1 billion, and the sale was made to Bovis Homes (LON:BVS). This deal was mutually beneficial as Galliford needed to dispose of a non-core business, and focus on its main activities, while Bovis are well experienced in that area, and can take advantage of economies of scale. The takeover is a win-win has it helps Galliford turn a corner, while the Linden unit gets the expertise of a major player in the sector.

As far as global stock markets are concerned, 2019 is set finish on a far better note than it began. The bullish sentiment in equity markets should mean that M&A activity in 2020 will be similar to what we saw in the latter half of this year. Deals are often funded through equity, and high equity valuations should spur more empire building. Interest rates are very low, and several major central banks around the would cut rates this year, and it seems that monetary policy is likely to remain loose for the foreseeable future ,and that should fuel takeover M&A activity too.

DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.

No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

Original Post

Merger And Acquisition Deals Poised To Be Strong In 2020
 

Related Articles

Michael Hewson
Robinhood IPO Falls Flat By Michael Hewson - Jul 30, 2021

After much anticipation in the weeks and months after filing for its IPO on March 23rd Robinhood (NASDAQ:HOOD) Markets finally started trading yesterday, pricing at $38 on its...

Merger And Acquisition Deals Poised To Be Strong In 2020

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The inherent concept of such investments means that they are not suitable for the investor seeking income from such investments, and are only suitable for those who have the required experience and understand the market risks. You should carefully consider your investment objectives, level of experience, and seek advice from an independent financial advisor if you have any doubts.
Continue with Google
or
Sign up with Email