Mergers and acquisitions came roaring back this year, with global deal values and volumes showing tremendous resilience. Indeed, 2014 was the best year for mergers and acquisitions since before the financial crisis, with strength spread across market sectors and global regions.
True, fourth-quarter numbers have yet to come out, but the most recent data is still impressive when it comes to this year’s mergers and acquisitions. Global deal volume topped $3 trillion — a more than 50% increase from 2013, according to Thomson Reuters.
In the U.S., mergers and acquisitions were particularly robust. For the 12 months ended Nov. 30, the U.S. M&A market saw the number of deals worth at least $1 billion rise 43% year-over-year to 295, according to data from FactSet.
Why is this good news for investors? Because the market loves mergers and acquisitions. Not only do deals reveal confidence in the economy and stock market, but they take shares out of circulation, making remaining shares more valuable.
The outlook for mergers and acquisitions in 2015 is for even more growth, but let’s take a minute to look back at this year’s biggest deals by value first. (To make this list most useful for retail investors, we only include M&A with a surviving company listed on a U.S. exchange.)
#10: Top Mergers and Acquisitions: Novartis AG (NVS) and GlaxoSmithKline (GSK)
Price: $20 billion
The pharmaceutical industry saw a flurry of mergers and acquisitions this year, but none was more complicated than this one. Novartis AG (NVS) and GlaxoSmithKline (GSK) agreed to swap $20 billion in assets in what amounted to major restructurings for both firms.
Novartis bought GlaxoSmithKline’s cancer drug business, GSK took Novartis’s vaccine business, and the companies agreed to combine their respective over-the-counter and consumer drug businesses. Whew.
All the big pharmaceuticals players are desperately trying to “focus” their businesses (read: cuts costs until revenue comes back), and — on paper, at least — this deal makes sense.
#9: Top Mergers and Acquisitions: Facebook Inc (FB) and WhatsApp
Price: $22 billion
Facebook Inc (FB) has a reputation for headline-grabbing acquisitions, but no deal it did in 2014 generated as much heat and light as its purchase of WhatsApp.
The largest-ever purchase of a venture capital-backed firm cost FB $22 billion — up from the $16 billion-price given at the announcement of the deal.
So why did FB take this expensive plunge? As it touted at the time, WhatsApp — a free text message service — is about twice as large by user base as Twitter Inc (TWTR). True, Twitter’s market value has since fallen to $23 billion from $26 billion at the time of the FB deal, but it’s too soon to call this move a dud.
#8: Top Mergers and Acquisitions: Actavis (ACT) and Forest Laboratories
Price: $25 billion
Dealmaking in the pharmaceutical industry had been pretty active even during the past few years of slow M&A. That made a $25 billion deal like Actavis’ (ACT) purchase of Forest Laboratories, Inc. something less than a surprise.
It was also hardly a surprise that activist investor Carl Icahn was involved in the deal. Carl Icahn owned an 11%interest in Forest Labs and was pushing hard for a deal. Hey, that’s what so-called activist investors do.
No, Icahn doesn’t always win — but he wins more often than he loses. That’s how Actavis, a maker of generic and over-the-counter drugs, came to buy Forest and its portfolio of medications for everything from irritable bowel syndrome to dementia.
#7 Top Mergers and Acquisitions: Reynolds American, Inc. (RAI) and Lorillard Inc. (LO)
Price: $27 billion
Between competing with larger rival Altria Group Inc (MO) and the inexorable loss of cigarette smokers, Reynolds American (RAI) and Lorillard (LO) had to do something dramatic.
The idea is that RAI buys LO, and then sells some signatures brands — such as Kool, Salem and Winston — to the U.K.’s Imperial Tobacco for $7.1 billion in order to get antitrust approval. At the same time, British American Tobacco PLC (ADR) (BTI) buys additional shares in Reynolds to maintain its stake in the new company and help finance the deal.
Tobacco hasn’t seen this kind of activity from mergers and acquisitions in ages. Given the way the industry is both shrinking and consolidating, we may never see a tobacco deal of this magnitude ever again.
#6 Top Mergers and Acquisitions: Halliburton Company (HAL) and Baker Hughes Incorporated (BHI)
Price: $35 billion
When it comes to fracking and horizontal drilling, Halliburton Company (HAL) and Baker Hughes Incorporated (BHI) — along with Schlumberger Limited (SLB) — are the really the only games in town. With the drop in oil prices threatening to make fracking unprofitable, a little friendly M&A in the sector makes a lot of sense.
For decades, these two oil-services companies have been bitter competitors. Indeed, rumors of a hostile bid by HAL for BHI were circulating just days before the deal news. But with oil prices in decline and the need to better compete with industry giant SLB apparently led cooler heads to prevail.
However, this deal would consolidate so much of the oil services industry, it may not pass antitrust muster.
#5 Top Mergers and Acquisitions: Medtronic, Inc. (MDT) and Covidien (COV)
Price: $43 billion
At $43 billion, this deal was a whopper, even for the red-hot healthcare industry. But when Medtronic, Inc. (MDT) and Ireland’s Covidien (COV) hooked up, this was no mere merger of medical device makers.
True, by adding Covidien’s portfolio of hospital supplies to its armory, Medtronic is better able to compete with top dog Johnson & Johnson (JNJ) in the medical device business. But in reality, this was all about taxes.
For tax law purposes, the combined company will be based in Ireland. Since U.S. companies don’t like bringing profits earned overseas back home because of the tax hit, the deal should free up cash.
Don’t be surprised if Medtronic stock buybacks and dividend hikes soon follow.
#4 Top Mergers and Acquisitions: Actavis (ACT) and Allergan (AGN)
Price: $66 billion
Like Carl Icahn, activist investor Bill Ackman wins more than he loses, but he lost this one big-time. The hedge-fund billionaire took a 10% stake in Valeant Pharmaceuticals (VRX) to lead a hostile pursuit of Botox-maker Allergan, Inc. (AGN) — but couldn’t pull it off.
Rather, after seven months of drama, Allergan found a white knight in Actavis, which topped the Valeant bid by about $12 billion. Actavis, of course, was the same company that made a winner out of Carl Icahn when it bought Forest Labs for $25 billion this year.
As for the actual business of developing pharmaceuticals, the deal unites Allergan’s ophthalmology, neurosciences, and dermatology business and Actavis’ gastroenterology and women’s health franchises.
#3 Top Mergers and Acquisitions: AT&T Inc. (T) and DirecTV (DTV)
Price: $67 billion
The third-largest deal of the year was AT&T Inc.’s (T) acquisition of satellite-TV provider DirecTV (DTV) for $48.9 billion cash and the assumption of $17 billion in debt. Given the tsunami of consolidation washing over sector, this deal was no surprise. Indeed, when it comes to mergers and acquisitions, AT&T almost had no choice.
Not after Verizon Communications Inc. (VZ) bought out Vodafone Group’s (VOD) stake in Verizon Wireless in 2012, and Comcast Corporation (CMCSA) struck a deal for Time Warner Cable Inc (TWC) in Q1. (Up next our list.)
It’s not just that telcos need to bundle services for internet, phone, wireless and television to compete — they also need to bulk up in order to negotiate fees with media giants like Walt Disney Co’s (DIS) ESPN.
#2 Top Mergers and Acquisitions: Comcast Corporation (CMCSA) and Time Warner Cable Inc (TWC)
Price: $70 billion
Excluding debt, the AT&T’s deal for DirecTV was a bit bigger than the behemoth, but why quibble over a billion here, a billion there? The bottom line is that this M&A would unite the two largest cable operators in the U.S.
As noted above, cable companies are seeking size and leverage in their negotiations with the people who create the programming because it’s getting so expensive — notably lives sports events, which don’t tend to get DVR’d.
That doesn’t automatically translate to cheaper fees for uses of Comcast-Time Warner Cable, which will keep any cost breaks it gets. After all, it’s hard to see how anything the cable industry does gives customers a break.
#1 Top Mergers and Acquisitions: Kinder Morgan Inc (KMI) and Kinder Morgan Energy Partners LP (KMP), Kinder Morgan Management, LLC (KMR) and El Paso Pipeline Partners, LP. (EPB)
Price: $76 billion
In a year dominated by healthcare sector M&A, it’s a bit surprising to see a deal from the energy sector take the top spot — but there it is.
Originally announced as a deal worth $44 billion, by the time Kinder Morgan Inc (KMI) finished buying all the outstanding stock in … take a deep breath … Kinder Morgan Energy Partners LP (KMP), Kinder Morgan Management, LLC (KMR) and El Paso Pipeline Partners L.P. (EPB), the transaction value came to $76 billion.
As the company said at the time, this is the second largest energy transaction in history, creating the third largest energy company in North America. KMI is also the biggest midstream energy company in the U.S. because of this deal.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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