With the myriad issues that coronavirus has raised for companies, ranging from work-from-home arrangements to complete business stoppages, it’s no wonder why M&A activity has slowed in recent months. In late March, Xerox abandoned its $35 billion hostile bid for HP Inc, referencing the need to focus on managing through the pandemic. In early April, retail developer Pacific Collective cited California’s lockdown and force majeure to sue ExxonMobil and delay their planned real estate purchase. However, while many firms are seeking to preserve cash, others are looking to capitalize on what could ultimately be the best buying opportunity for years to come.
Asset values have reset lower amid the global economic slowdown, potentially a tailwind for deal activity later in the year “once the dust settles”. The S&P 500 is down over 15% in 2020 at the time of writing and a group of small-cap buyout targets tracked by RBC are now valued at an average of 8.5x earnings before interest, tax, depreciation, and amortization expenses, meaningfully down from 10.6x in 2019. Additionally, political scrutiny of share buybacks may make acquisitions a relatively more attractive use of cash.
So, who are the buyers?
Financial buyers will remain highly active – private equity firms have approximately $1.5 trillion of dry powder available to deploy, according to data from Preqin, and lockdowns are already creating distressed opportunities, especially in retail, real estate and energy. For strategic buyers, expect well-capitalized companies with excess cash and access to capital markets to be the most aggressive. Sector will also be a significant factor. In past recessions, energy and consumer discretionary companies have generally taken the deepest hits to earnings and the longest time to recovery; healthcare and consumer staples are typically more resilient. Any near-term strategic M&A is likely to be concentrated in the relatively stable sectors, whereas buyers in stressed industries will likely be patient given uncertainty around the timing and type (“U-”, “V-”, or even “W-shaped”) of the eventual recovery.
Below, we highlight select companies across industries that have recently been active acquirors, or signaled their desire to be opportunistic, despite the coronavirus pandemic.
Technology – Apple
Apple has reportedly made 3 acquisitions since March 31st – The Dark Sky Company and Voysis for undisclosed amounts and NextVR for $100 million – matching their total deal activity in the second half of 2019. Apple had over $200 billion of cash and marketable securities on hand as of December 2019, leaving significant flexibility to pursue additional strategic acquisitions.
Industrial – Honeywell
In a March investor presentation, CFO Gregory Lewis highlighted Honeywell’s significant liquidity, including over $10 billion cash on hand. This “really does give us significant opportunities to deploy capital into acquisitions and buybacks…at increasingly attractive valuations. We remain cautious, but we feel like we’re well positioned,” said Lewis. Honeywell historically makes several acquisitions each year, but has not announced any so far in 2020.
Financials – JP Morgan
In February, JP Morgan CEO Jamie Dimon told investors that the largest US bank by assets will be more aggressive making acquisitions to combat new competition from tech giants as well as fintech start-ups. In 2019, JP Morgan acquired healthcare payments network company InstaMed for $500 million (8x revenue).
Consumer – Hormel Foods
Hormel Foods had over $700 million of cash as of January 2020, which it put to use acquiring Sadler’s Smokehouse at a $270 million valuation in March. “This is a very strategic acquisition for our foodservice business and it gives us another successful brand to expand into the retail and deli channels,” said Jim Snee, Chairman, President and CEO at Hormel.
Communications – Verizon
Seeking to capitalize on the surge of people working from home as a result of coronavirus, Verizon reportedly agreed earlier in April to acquire cloud-based video conferencing company BlueJeans. Verizon had approximately $2.6 billion of cash as of December 2019, and their recommitment to debt reduction in 2019 has created additional flexibility to pursue opportunistic acquisitions.
Healthcare – Humana
In March, Humana CEO told investors that they would continue to be opportunistic acquirors. Humana held over $15 billion of cash as of December 2019.
Energy – ExxonMobil
Energy producers have been among the most impacted by the coronavirus. Exxon announced it would slash capital spending and operating expenses, but plunging commodity prices (even into negative territory for certain contracts) may also ultimately set the stage for a wave of consolidation led by companies with access to capital. ExxonMobil has double-A credit ratings and raised $18 billion of debt financing in March and April to build flexibility. In the fall, CEO Darren Woods told investors to expect consolidation and that “time’s on our side” when it comes to making an opportunistic acquisition.
Business Services – Accenture
Accenture continues to commit significant resources to M&A, with CFO Kathleen McClure stating in their March earnings call that “we continue to expect to invest up to $1.6 billion in acquisitions this [fiscal] year [and] we’ve already committed $1.1 billion to date.” Accenture has already closed over a dozen acquisitions in 2020 (including 3 so far in April) and has ample dry powder remaining, with over $5 billion cash on hand as of February 2020.
For business owners considering a sale, identifying the universe of potential buyers for their company is more important now than ever. Mirus has conversations – and has transacted – with many of these and other active buyers and can leverage our relationships and experience to help business owners accomplish their goals in this challenging time.