Going into 2020, there were expectations that mergers and acquisitions (M&A) activity would be weaker than in 2019. The global economy was experiencing a fairly large degree of uncertainty primarily due to the two largest economies—the United States and China—continuing to spar over trade, as well as the fact that the U.S. presidential election was scheduled for the fall. Then, COVID-19 became a much bigger issue than the market expected and pushed M&A activity even lower. Some deals, however, were still done. We'll look at some of the highlights in M&A this past year.
- 2020 was a challenging year for the markets due to the impacts of COVID-19. This began to suppress dealmaking starting in March.
- Many of the deals taking place in the oil and gas sector were driven by a need to consolidate in order to survive the low-price environment.
- Two of the biggest deals took place among chipmakers in response to big tech customers making their own chips.
- Acquisitions in the financial sector suggest that online brokerage competition and the desire for more financial data will remain robust.
2020 Mergers and Acquisitions
Even in a down year, there are far too many deals happening across the globe to cover in any depth. Instead of trying to be comprehensive, we'll look at some of the deals that should interest investors given the year we've had.
As with all M&A, these deals will fall into a few different buckets as far as classification. There are the pure expansion deals where one of the companies involved is looking to grow bigger, expand to new markets, or access a new market segment. Then there are deals that are focused on consolidation or cost reduction for the purpose of increasing operations and lowering costs through economies of scale. Lastly, there are desperation deals where two players in a struggling industry join forces just to survive. As you can probably guess, 2020 saw a few of those, as well.
Morgan Stanley (MS) Buys E*TRADE
The Morgan Stanley (MS) purchase of E*TRADE for $13 billion in an all-stock deal announced back in February this year made headlines when it happened, but it has largely been forgotten since. This deal is notable because it was part of a trend in the online brokerage industry of companies bulking up quickly and improving their platforms through acquisition. The Charles Schwab Corporation (SCHW) announced that it was buying TD Ameritrade in 2019, so the other players began to scale up, as well. Morgan Stanley's deal is one of the few on this list that were announced and closed this year. As the larger players digest their acquisitions, investors can expect the competition among online brokers in terms of total trading costs and platform features to continue heating up.
S&P Global (SPGI) to Buy IHS Markit
S&P Global Inc. (SPGI) announced one of the biggest deals in 2020 with its proposed acquisition of IHS Markit Ltd. (INFO) for $44 billion in another all-stock deal. Like the Morgan Stanley deal, this one should interest investors because of the trend rather than the deal itself. Finance has always been driven by data, but this appetite is increasing as quantitative trading, robo-advisories, and algorithmic trading grow in popularity. S&P Global is attempting to position itself to ride that trend well into the future.
Chipmakers Scale Up
Two massive deals were announced in the semiconductor industry this year, as Analog Devices, Inc. (ADI) announced that it would buy Maxim Integrated Products, Inc. (MXIM) for $22 billion, and then NVIDIA Corporation (NVDA) announced it would buy Arm Limited from Softbank Group Corp. (SFTBY) for $40 billion. Both deals have to be approved by regulators. The NVIDIA deal, in particular, will face scrutiny due to the licensing arrangements between Arm and other chipmakers.
The recent push by device manufacturers like Apple Inc. (AAPL), Amazon.com, Inc. (AMZN), Microsoft Corporation (MSFT), and Alphabet Inc.'s (GOOG) Google into making in-house chips for their various devices is considered a threat to established chipmakers. One way the chipmakers could confront this threat is to get bigger, better, faster, and cheaper so that their big tech customers couldn't make the argument that it is easier to make custom chips themselves.
Wave of Consolidation in Energy
The pandemic was brutal for an already fragile oil and gas industry. There were several rounds of survival-type dealmaking at all levels of the value chain. Some of the notable mergers and acquisitions include Chevron Corporation (CVX) buying Noble Energy for $5 billion, Pioneer Natural Resources Company (PXD) announcing a $4.5 billion purchase of Parsley Energy, Inc. (PE), Cenovus Energy Inc. (CVE) and Husky Energy Inc. (HSE) announcing a $2.89 billion merger, Devon Energy Corporation (DVN) and WPX Energy, Inc. (WPX) conducting a $6 billion merger, and ConocoPhillips (COP) announcing a $9.7 billion purchase of Concho Resources Inc. (CXO).
This doesn't even touch on the divestment deals, like Dominion Energy, Inc. (D) selling its gas transmission and storage assets to Berkshire Hathaway Inc. (BRK.A) in a nearly $10 billion deal including debt, or BP p.l.c. (BP) announcing the $5 billion sale of its petrochemical business.
The energy industry has pockets of strength, but most companies will continue to struggle unless there is a robust recovery in demand. If we do see a rebound in 2021, these companies will be running a larger asset base with leaner cost structures, so the cash flows should be much improved. If low prices continue, however, expect more dealmaking in order for companies to survive.
The Bottom Line
Mergers and acquisitions happen in all types of markets, and the chaos of 2020 was no different. Clearly, some industries are seeing mergers because of the challenges this year. Other sectors like tech are seeing surging acquisitions based on valuation strength, as with Salesforce.com, inc. (CRM) buying Slack Technologies, Inc. (WORK), Uber Technologies, Inc. (UBER) buying Postmates, and Amazon buying Zoox.
Overall, the pace of deals seems to have picked up as 2020 wore on. Investors can likely look forward to stronger M&A activity in 2021 as a post-COVID world becomes more of a reality.