[Editor’s note: “10 M&A Deals I’d Love to See Happen in the Second Half of 2020” was previously published in June 2020. It has since been updated to include the most relevant information available.]
Apart from the human toll of the novel coronavirus, many industries and businesses have been upended by the economic effects of Covid-19. That includes the mergers and acquisition industry, where data shows M&A deals, and as a result, M&A stocks, have been way down.
According to Dealogic, the value of M&A tocks in big deals on a global basis in the first three months of 2020 was down 35% from the fourth quarter of 2019. In the U.S., it was even worse, declining by 39% during the quarter.
Refinitiv says the worldwide M&A activity in the first quarter totaled $731 million, while in the U.S. it was $256 million, both down significantly over the same period a year earlier. For M&A deals greater than $10 billion, the first quarter was the worst since 2017.
Between deals getting paused due to the coronavirus and funding not as readily available, there is a scarcity of good deals happening.
- Wells Fargo (NYSE:WFC)
- Lululemon (NASDAQ:LULU), VF Corp. (NYSE:VFC)
- Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), Fairfax Financial (OTCMKTS:FRFHF)
- JD.com (NASDAQ:JD), MercadoLibre (NASDAQ:MELI)
- Domino’s Pizza (NYSE:DPZ), McDonald’s (NYSE:MCD)
- Philip Morris International (NYSE:PM), Altria (NYSE:MO)
- Boston Beer (NYSE:SAM), Brown-Forman (NYSE:BF.B)
- SVB Financial (NASDAQ:SIVB), Canadian Imperial Bank of Commerce (NYSE:CM)
- S&P Global (NYSE:SPGI), MSCI (NYSE:MSCI)
- Microsoft (NASDAQ:MSFT), Adobe (NASDAQ:ADBE)
Because I’m a bit of dreamer, I’ve come up with the above M&A stocks and the deals I’d love to see happen, but probably won’t.
Wells Fargo (WFC) and Almost Anybody
As Wells Fargo continues to trade well below its 2018 high of close to $70, rumors are circulating that the bank is considering a tie-up with Goldman Sachs (NYSE:GS) so that the combined entity can better compete with Jamie Dimon and JPMorgan (NYSE:JPM).
“Background on @WellsFargo – @GoldmanSachs possible merger. High-level banker speculation combining a big commercial bank w top investment bank to compete w @jpmorgan. Wells CEO Charlie Scharf a close associate of Jamie Dimon. @DavidSolomon needs a deal $GS $WFC more as I get it,” Fox Business’s Charlie Gasparino tweeted in mid-May.
The only problem with this tie-up is regulators wouldn’t let it happen because the two companies have a combined deposit market share of 11.5%. Also standing in the way, according to JPMorgan analysts, is the $1.952 trillion asset cap currently imposed by the Federal Reserve on Wells Fargo. WFC is right at the cap. Adding GS would put it a trillion dollars over.
While it would be nice to get Wells Fargo in the hands of better bankers, the reality is, nothing’s going to happen on the M&A front until the bank gets out of the Fed’s doghouse.
Lululemon (LULU) and VF (VFC)
I’m probably going to pay for such an outlandish proposition. And while it seems far-fetched for a brand of Lululemon’s caliber to merge with anyone, I believe that LULU’s just the company to get the long-time apparel conglomerate back in a growth focus.
It was just over a year ago that VF officially separated Kontoor Brands (NYSE:KTB), the maker of Lee and Wrangler Jeans, from the company. That left VF with a number of quality brands including Vans, The North Face, and Timberland.
The key piece for VF is Vans, the lifestyle brand that continues to grow. In fiscal 2019, despite Covid-19, Vans managed to grow its sales by 11% on a worldwide basis. Vans is part of VF’s Active segment, In 2019, the segment had sales of $4.92 billion and $1.14 billion in profits for an operating margin of 23.1%.
The active segment accounted for 47% of its revenue and of its profit. Vans combined with LULU would create a tremendous cash flow machine.
VF shareholders would love it. Lululemon’s probably wouldn’t be thrilled. It’s a non-starter. Especially now that Lululemon has acquired at-home fitness company Mirror.
Berkshire Hathaway (BRK.A, BRK.B) and Fairfax Financial (FRFHF)
Unless you live in Canada and follow the markets, you’re probably wondering what the heck Fairfax Financial is.
Run by founder Prem Watsa, it’s often referred to as the Canadian version of Berkshire Hathaway; it has performed in a similar fashion to Buffett’s holding company in recent years. Built on insurance, Fairfax has waded into all kinds of value investments in retail and elsewhere. And they haven’t performed.
Down 34% year to date through July 19, including dividends, Fairfax stock is trading at two-thirds book value. Industry experts are questioning Watsa’s capital allocation decisions.
“I think Prem’s track record in terms of allocating capital has certainly come into question,” Jason del Vicario, a portfolio manager at HollisWealth, told the Globe and Mail recently. “The last 10 years, he hasn’t had real home runs and he’s been mired in a lot of these deep-value, troubled assets.”
Watsa isn’t fazed by the company’s current fate. It has traded below book value before, and it probably will again at some point in the future. By comparison, Berkshire stock is currently trading at 1.2 times book value, about double Fairfax’s multiple.
JD.com (JD) and MercadoLibre (MELI)
JD.com is the second-largest e-commerce company in China.
MercadoLibra, meanwhile, is the largest e-commerce company in Latin America. It sells in 18 different countries. The biggest common denominator between the two: They dominate Amazon (NASDAQ:AMZN) in their respective home markets.
Amazon’s done a great job of capturing market share in the U.S. and Canada, but when it comes to China and Latin America, these two wipe the floor with Jeff Bezos.
However, MercadoLibre is in the middle of a massive expansion to capture even more of the Latin American e-commerce dollar. In 2019, MercadoLibre sold $1.9 billion of its stock to fund this expansion. So far this year, the stock price nearly has tripled.
I doubt the Chinese company would want to take on the headaches of operating in Latin America. That said, it would make a nice competitor to Amazon in North America and elsewhere.
Domino’s Pizza (DPZ) and McDonald’s (MCD)
There are two reasons why I think McDonald’s would consider buying Domino’s.
First, it failed miserably at pizza in the 1980s. At the time, pizza was selling big time. Pizza Hut’s sales were growing 10% per year. In 1986, it tested calzone-style pizza on a regional basis but didn’t go anywhere. It then developed an oven that could cook pizza in just six minutes. Testing began in earnest in 1989.
Using 24 restaurants in Kentucky and Indiana, McDonald’s went to work on pizza domination. It failed quite quickly in the U.S. Canada did a little better but those stores ultimately failed too.
“Although it was a popular menu item in Canada, the preparation time was about 11 minutes—which was way too long for us. Every McDonald’s has a busy kitchen and the pizza slowed down our game,” stated McDonald’s Canada in 2015.
“And since speed of service is a top priority and expected by our customers, we thought it best to remove this menu item. For now, our pizzas will have to remain a tasty bit of history.”
Under the management of Domino’s, pizza could work.
Philip Morris International (PM) and Altria (MO)
The merger talks between Philip Morris and Altria first started last August.
The two companies were one until March 2008, when Altria spun-off Philip Morris International, the company’s business outside the U.S. Altria shareholders got one share of PM stock for every MO share held. Activist investors at the time wanted the company to spin off its faster-growing international business and then plow more funds into dividends and share buybacks.
In September 2019, the two companies called off the merger, opting to work together to grow its smokeless IQOS product in the U.S.
“We expect the stocks to trade up sharply (especially PM) since clearly the market wasn’t in favor of this combination, with PM trading up more than MO as concerns about JUUL have weighed on MO and will likely continue to weigh on MO’s multiple,” Wells Fargo analyst Bonnie Herzog said at the time. “However, we continue to think those concerns are overblown and continue to recommend the stock [Altria].”
Since calling off the merger, both stocks have fallen in price. It’s time to revisit the cost synergies of doing the deal.
Boston Beer (SAM) and Brown-Forman (BF.B)
This isn’t an original idea. I first pitched the idea in March 2017.
“If you take a look at Brown-Forman Corporation’s roster of brands you’ll notice that while it has some of the best names in Whiskey (Jack Daniel’s, Woodford Reserve), Scotch (The Benriach), Tequila (Herradura), Vodka (Finlandia) and Wine (Sonoma-Cutrer), it has no representation in the beer category,” I wrote at the time.
At the time, SAM stock could be had for a song — it was trading at 21 times earnings and near a 52-week low — but today it’s up 286% over a little more than three years. Meanwhile, BF.B stock has gained 76% over the same period. Respectable, but not quite the same.
Much of Boston Beer’s success has to do with products other than beer — the company’s Truly Hard Seltzers hold 20% market share in the U.S., second only to White Claw at 56% — which means a buy today would give the controlling Brown family more than just beer.
Despite Boston Beer’s appreciation since 2017, it’s a deal that still makes sense.
SVB Financial (SIVB) and Canadian Imperial Bank of Commerce (CM)
At first blush, the idea of a Silicon Valley bank merging with a Canadian bank makes little sense. One lends to tech innovators and entrepreneurs, the other makes a lot of residential mortgages. There hardly appears to be an overlap.
It doesn’t help that Canadian Imperial Bank of Commerce’s second-quarter profit fell by 70% to 400 million CAD from 1.34 billion CAD a year earlier as a result of the bank setting aside 1.41 billion CAD in future loan losses, almost seven times what it set aside a year ago.
As for SVB Financial, it has a total return of -15.2% year to date through June 1, less than half the decline of regional banks in the U.S., but three times worse the entire U.S. markets.
So, why merge? In March 2019, Silicon Valley Bank opened a Canadian branch to cater to its existing customers closer to where they are headquartered.
“Building on SVB’s longstanding track record of supporting technology companies in the US, we are excited to help Canada’s entrepreneurs grow and scale,” said Barbara Dirks, the Head of Canada at Silicon Valley Bank at the time of the announcement. “Our clients appreciate the partnership with us and our highly specialized approach, fast pace, industry expertise and global network.”
Together, the banks could be the leaders in tech and innovation lending throughout North America.
S&P Global (SPGI) and MSCI (MSCI)
How many index providers do you think there are in the world? According to Stock Market MBA, there are 1,889 exchange-traded funds that track an index. S&P Dow Jones and MSCI are the top two with 384 and 254, respectively. Together, they’d have a 34% market share.
In 2019, SPGI’s indices segment had an operating profit of $630 million from $918 million in revenue. MSCI’s index segment had adjusted EBITDA of $670.2 million in 2019 from $921 million in revenue. MSCI’s index business accounts for a much bigger piece of its overall business.
If one of the companies were to object to the hiving off, it would most likely be MSCI because it would be left with far less in its existing businesses than SPGI.
Just as ETF providers are consolidating, it makes sense for index providers to do the same.
Microsoft (MSFT) and Adobe (ADBE)
In early February, I said that ADBE stock would hit $400 in 2020. At the time, it was trading around $367. It was the first time I’d written about the PDF creator in a long time. I was impressed by how much it had changed through its transition to the cloud.
Of course, Murphy’s Law hit with the coronavirus taking hold, and its stock fell to $285 by mid-March. In the two months since it’s come roaring back and now trades within $12 of my $400 target.
In mid-May, I included Adobe in a list of 20 stocks to buy if you’re betting on America. I argued that the company’s move to the cloud has made it a growth company once more. By merging with Microsoft, it could gain access to some of the best people working in the cloud industry today.
Now, I’m sure there’s a techie out there who’s got a million reasons why Microsoft wouldn’t want to buy Adobe, but I thought I’d put it out there anyway.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.