Mergers and acquisitions continued to roll in the third quarter, with the market getting eye-popping deals in the healthcare, energy and industrials sectors.
Of course, that’s just the way it is on Wall Street these days. Investments bankers are feeding on fees from the best year for M&A since before the financial crisis. Indeed, through the first half of the year, global mergers and acquisitions activity rose 38% year-over-year to $2.18 trillion, according to data from Thomson Reuters.
As usual, a great chunk of that deal activity came from U.S. companies, as mergers and acquisitions rose 60% to $987.7 billion. For banking and legal advisers, business hasn’t been this brisk in the first half of a year since 1980.
But plain old retail investors benefit from all this wheeling and dealing too. The market is preoccupied with other things at the moment, but make no mistake — it loves M&A. A flurry of deal activity signals that companies have confidence in the economy and stock market.
By that measure, corporate boardrooms are feeling quite confident, indeed. The third quarter was awash in big deals.
Just look at the five largest announced mergers and acquisitions among U.S. companies from July through September:
Top Mergers and Acquisitions: Aetna and Humana
Healthcare stocks have led the mergers and acquisitions charge throughout this period of heightened activity, but it’s not just pharmaceuticals companies having all the fun. Even the insurers are partnering up.
Aetna (AET) is buying Humana (HUM) in a deal worth $37 billion, and the combined entity will be a whopper — especially with what AET has been up to since the announcement. The AET-HUM tie-up alone would create a company with estimated operating revenue of $115 billion.
The Affordable Care Act is creating a wealth of opportunities in the healthcare industry, and this merger helps these two companies get their share. Indeed, the new company will serve 33 million people.
Top Mergers and Acquisitions: Berkshire Hathaway and Precision Castparts
Warren Buffett likes to hunt for big mergers and acquisitions game, but he has lamented for years his inability to bag an elephant.
Not anymore.
The biggest acquisition in Berkshire Hathaway’s (BRK.A, BRK.B) history has Warren Buffett’s company scooping up aerospace supplier Precision Castparts (PCP) in a deal valued at $37.2 billion, including debt. PCP supplies components of jet engines, among other goods.
Berkshire has a history of taking over industrial companies like PCP because even if they’re cyclical, the economy’s long-term trend is one of growth.
In the case of Precision Castparts, Warren Buffett is betting on the continued expansion of global air travel.
Top Mergers and Acquisitions: Energy Transfer Equity and Williams Cos.
Plunging prices for crude oil and natural gas are forcing companies across the energy sector to partner up.
On the pipeline front, the biggest deal came courtesy Energy Transfer Equity (ETE), which is paying $37.7 billion, including debt, for Williams Companies (WMB).
Economies of scale in the energy sector are more critical than ever with the rout in oil prices, and the infrastructure business does appear to offer cost-cutting synergies.
Once completed, the combined company will operate more than 100,000 miles of oil and natural gas pipelines, making it one of the five largest energy companies in the world.
Top Mergers and Acquisitions: Teva Pharmaceutical and Allergan
Leave it to the healthcare sector to produce the largest M&A explosion in the third quarter.
In another takeover in the pharma industry, Teva Pharmaceutical (TEVA) is acquiring the generic drug business of Allergan (AGN) for $40.5 billion.
Consolidation in the pharma business is partly being driven by mergers and acquisitions among health insurers and pharmacy benefits managers. Those sectors are seeing their own waves of deals to negotiate better terms with drug manufacturers.
The generics business does make more sense as part of Teva than Allergan. After all, Teva is the largest competitor in the space and has the greatest opportunity to leverage economies of scale.
Top Mergers and Acquisitions: Anthem and Cigna
That’s right: Another healthcare M&A move.
In this case, Anthem (ANTM) is spending lavish $48.3 billion on Cigna (CI). It had to. The AET-HUM deal actually forced Cigna into the Anthem fold.
The resulting cost cuts, economies of scale and pricing power afforded by the Aetna-Humana deal put CI as a standalone company in a vulnerable position.
That said, this is hardly a done deal. Another acquisition would cut the number of major health insurers down to three from five.
The possibility that federal regulators could block this acquisition on antitrust grounds would appear to be greater than usual.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
