Financial managers looking to complete mergers and acquisitions face high price demands and strong competition from other firms looking to win contracts. Some seize the opportunity, others hold back.
According to data provider Dealogic, executives have made 1,270 deals with U.S. companies this year, compared to 1,665 deals in the same period in 2020, but have spent more than three times as much money on these acquisitions. Buyers spent $321.16 billion through Tuesday on mergers and acquisitions of U.S. companies, up from $103.06 billion a year earlier, Dealogic said.
Business leaders said they were looking for deals to accelerate growth and position their companies in a post-pandemic world. But high stock market valuations, low financing costs and a growing number of companies specializing in special acquisitions are driving up prices, a trend that has been evident over the past year.
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Multiples for global transactions, calculated as the ratio of median enterprise value to earnings before interest, taxes, depreciation and amortisation, have risen from 13 times in 2019 to 14 times in 2020, according to consultancy Bain & Co. According to Bain, valuations have risen in sectors such as technology, telecommunications, digital media and pharmaceuticals, while other sectors such as retail and energy have fallen. This overall growth contrasts with the financial crisis of 2008 and 2009, when the number of transactions fell by about 30 percent in two years, according to Bain.
It’s harder to close deals than it used to be, says Glenn Schiffman, chief financial officer of IAC/InterActiveCorp, a conglomerate known for its penchant for acquisitions. Asset prices are rising and competition is getting fiercer, including from SPACs, he said, adding that TSI is exploring the market for companies looking to expand their e-business portfolio.
Supplier of network equipment
Cisco Systems Inc.
also interested in doing business, but not at any price, the CFO
R. Scott Herren.
Said. The estimates are insane, he said, adding that he doesn’t expect a reset anytime soon. According to Herren, CFOs should not just buy to increase revenue, but find a company that fits into their company’s strategy.
Payment network
Visa Inc..,
whose acquisition of data aggregator Plaid was cancelled in January after an antitrust case was filed with the Department of Justice, also said it was looking for new opportunities in addition to investing in its existing business.
We may be in a situation where some vendors have unrealistic expectations, the CFO said.
Vasant Prabhu,
and added that Visa will continue to be disciplined. I still think everything is achievable, he said.
Vasanth Prabhu, Chief Financial Officer of Visa, at the 2017 conference.
Photo:
Blake/Microphone
But other companies, like
Qualcomm Inc.
and Eaton Corporation, continue to announce new acquisitions. Last month, Qualcomm announced it would spend about $1.4 billion on Nuvia Inc, which is developing a CPU chip that Qualcomm will integrate into its products. It is certainly an expensive acquisition, but we felt the balance sheet value was worth it, said Chief Financial Officer Akash Palhiwala.
The acquisition of Nuvia will help Qualcomm improve the performance and energy efficiency of the 5G internet, the company said. Qualcomm will continue to look for smaller acquisitions, Palhiwala said, adding that larger deals would be in order.
Dublin-based power management company Eaton agreed in late January to acquire Tripp Lite, a provider of power and connectivity solutions, for $1.65 billion. A few days later, the company announced that it had reached an agreement to acquire Cobham Mission Systems, a manufacturer of aircraft refueling systems, for $2.83 billion. According to the company’s CFO, these transactions were completed fairly quickly,
Richard Fearon,
Said.
Eaton will pay for both acquisitions with cash and proceeds from recent sales, Fearon said. The chief executive, who has made more than 70 acquisitions since taking over Eaton in 2002, said the acquisitions benefit the company’s strategy.
In a company in the food industry
Kraft Heinz Co.
HEAD OF FINANCE
Paulo Basilio
gets good grades. Last week, the company announced it was selling its nut business….
Hormel Foods Corp.
for $3.35 billion in cash. According to Mr Basilio, the proceeds of these and other divestitures can be used for acquisitions in addition to investments in the ongoing business.
Yet many companies do not make it to the finish line. There are many transactions that don’t add up, and valuations are one of them, said James Marshall, Senior Advisor, Corporate Mergers and Acquisitions at PricewaterhouseCoopers, a professional services firm.
Eaton’s Fearon said executives must be willing to pull out of companies that seem too expensive or not worthwhile, adding that his company has done so in the past 18 months.
We leave for different reasons, if the price is bad or the conditions are bad, he said. No deal is better than a bad deal.
Private companies are turning en masse to specialized acquisition companies, or SPACs, to bypass the traditional IPO process and go public. The WSJ explains why some critics argue that investing in these so-called empty-handed companies isn’t worth the risk. Illustration: Zoe Soriano/WSJ
Please email Nina Trentmann at [email protected].
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