Another Monday, another spate of deals news — this time involving three mergers and acquisitions for a combined total value of nearly $45 billion.
As we’ve written before, the return of deal activity is good for a host of characters — from advisers to shareholders in the target company to the market’s psychological well-being.
And goodness knows investment banks need the fees after years of suffering through a sleepy deal landscape. Moreover, as much as M&A activity helps bolster confidence in stocks and investment banks’ bottom lines, it also takes shares out of the market, thereby reducing the total supply of equities, which is a generally bullish development.
Today’s Merger Monday — the biggest in more than a month — brought the following deal news:
- In a so-called merger of equals worth $35 billion, Omnicom (OMC) will combine with Publicis Groupe (PUBGY) to form the world’s biggest advertising agency, with more than $23 billion in annual revenue.
- Perrigo (PRGO), a maker of generic drugs, will buy Irish biotechnology company Elan (ELN) for $6.7 billion in cash and stock. The deal ends months of drama regarding Elan’s future.
- Hudson’s Bay Company (HBAYF) — best known as the owner of high-end Lord & Taylor stores — will buy Saks (SKS) for $2.4 billion. Saks put itself on the sale rack months ago, and this deal ties up two of the biggest names in luxury retail.
The biggest story in terms of ink and pixels is the Omnicom-Publicis merger. And certainly Lord & Taylor pairing up with Saks has the sexiest names in Monday’s flurry of acquisitions.
But it’s the latest deal in the pharmaceutical industry — Perrigo and Elan — that will have the greatest import for the broader market.
True, Omnicom and Publicis sent waves rippling through the advertising business Monday, and it could spark other deals, but while the effects are probably large for clients like Coca-Cola (KO) and Pepsico (PEP), the same can’t be said for the market.
For one thing, there just aren’t that many publicly traded ad firms — especially large ones. Indeed, now that Omnicom and Publicis are merging, the Big Four are becoming the Big Three, leaving just Omnicom-Publicis, WPP (WPPGY) and Interpublic Group (IPG).
Besides, here in the U.S., WPP — like Publicis — trades on the over-the-counter market, so that doesn’t take shares out of the real market where mutual funds and ETFs play. And as for IPG, it has a market value of about $7 billion, making it a solid-if-unspectacular midcap stock. There simply isn’t a big enough publicly traded advertising sector to mean much to the broader market.
The same lack-of-market splash goes for Hudson’s Bay buying Saks. Yes, $2.4 billion is a lot of money — but not by the standards of M&A. This is a small deal. Furthermore, the luxury retail sector is by definition niche. This just doesn’t move the needle elsewhere in the retail sector.
Perrigo buying Elan, however, continues a key trend the market has been betting on — and benefiting from — all year: Consolidation in the healthcare sector.
It’s definitely heating up. Just last month, we got three big pieces of news from subsectors of the healthcare industry:
- European pharmaceuticals giant AstraZeneca (AZN) struck a deal for up to $1.15 billion for privately held Pearl Therapeutics, a U.S.-based manufacturer of respiratory drugs.
- Hospital operator Tenet Healthcare (THC) scooped up rival Vanguard Health Systems (VHS) for about $1.8 billion, plus the assumption of $2.5 billion in debt.
- Private-equity firm Kohlberg Kravis Roberts (KKR) made a deal to buy privately held PRA International, a huge provider of clinical laboratory services, for a reported $1.3 billion.
The healthcare sector has been on a tear this year. It’s leading the broader market by a wide margin thanks to sweeping changes wrought by the impending implementation of healthcare reform — and related deal activity.
Perrigo’s acquisition of Elan fortifies the case for betting on more M&A in healthcare stocks, and helps support the sector’s remarkable outperformance.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.