After two record years, expectations for mergers and acquisitions (M&A) in 2016 were tempered by extreme market volatility early in the year and growing uncertainty over the global economy. Through the first two quarters, M&A activity was down 18% compared with the same period in 2015. Going into year end there has yet to be a deal that exceeds $100 billion but there have been plenty of important multibillion-dollar deals. And one that was abandoned last minute.
AT&T and Time Warner - $86 Billion
On October 22, 2016, AT&T (T) and Time Warner (TWX) reportedly reached a deal in which AT&T will buy the media company for $86 billion according to various media reports.
For AT&T, a deal with Time Warner would give it a leading U.S. provider of pay-TV and internet service as well as popular content from the likes of HBO and access to sports including NBA basketball. AT&T has been keen to add more content and original programming as it gears up to launch its DirecTV Now streaming content service later this year.
Qualcomm and NXP Semiconductors - $47 Billion
NXP is the biggest supplier of chips in the automotive industry and serves more than 25,000 customers through its direct sales channel and global network of distribution channel partners. The combined company is expected to have annual revenues of more than $30 billion and Qualcomm expects to generate $500 million of annualized run-rate cost synergies within two years after the transaction closes. The transaction is expected to close by the end of the year.
Cable Exec Leo Hindery on Major M&As on the Horizon
Shire and Baxalta - $32 Billion
It took six months for Baxalta Inc. (NYSE: BXLT) to agree to a cash and stock offer from Shire PLC (NASDAQ: SHPG), but the acquisition was announced in January 2016, and the deal was completed five months later in June. The merger brings together two of the leading biopharmaceutical companies focused on treating rare diseases. Baxalta was spun off from Baxter International Inc. (NYSE: BAX) in 2015, and, within just a few weeks, became the target of a hostile takeover bid by Ireland-headquartered Shire. After Shire sweetened the deal with more cash, Baxalta came to the table.
With the acquisition, Shire became the global leader in rare disease research and treatment with a market capitalization of $45.66 billion, as of Aug. 4, 2016. The company expects to expand its global reach and increase revenues to $20 billion by 2020. Shire generated $6.6 billion in revenue in 2015. The stock was trading at $200 a share.
Abbott Laboratories and St. Jude Medical - $30.6 Billion
In April 2016, St. Jude Medical Inc. (NYSE: STJ) agreed to terms with Abbott Laboratories (NYSE: ABT) to be acquired for $85 a share. The deal includes cash and stock for St. Jude shareholders, as well as an assumption of $5.7 billion of debt by Abbott. The acquisition brings two of the larger medical device companies together to form a complementary portfolio of cardiovascular products. The combined company expects to gain a stronger position in an increasingly competitive space while gaining more pricing power in the market.
When completed, the merger is expected to result in $500 million in cost savings and boost Abbott's earnings per share (EPS) by 21 cents in 2017. As of Aug. 4, 2016, Abbott's shares were trading at $44.92, up 1.83% on the year, meanwhile St. Jude Medical was trading at $83.50, up 36% on the year.
Microsoft and LinkedIn - $26.2 Billion
Microsoft Corp. (NASDAQ: MSFT) fought off one of its competitors, Salesforce.com Inc. (NYSE: CRM), for the winning bid to acquire LinkedIn Corp. (NYSE: LNKD) for $196 per share. LinkedIn shares spiked 64% after the announcement made on June 3, 2016. LinkedIn, which was being pursued by as many as five companies, chose Microsoft to integrate LinkedIn’s powerful networking and customer relationship management (CRM) capabilities with Microsoft’s cloud capabilities.
Microsoft has been accelerating its inroads into social networking enterprises, especially in the professional and corporate arenas. On Aug. 1, 2016, the company sold nearly $20 billion in bonds, the fifth-largest bond deal on record, to raise funds for the acquisition. As of Aug. 4, its shares were trading at $57.50, up 3.98% year to date.
Johnson Controls and Tyco International - $16.6 Billion
In January 2015, U.S.-based Johnson Controls Inc. (NYSE: JCI) and Ireland-based Tyco International PLC (NYSE: TYC) agreed to a merger resulting in a corporate tax inversion for Johnson Controls. The merger has been closely scrutinized by Treasury officials, but it appears to have met key tests that keep it out of the scope of tax inversion rules. Unlike the failed Pfizer Inc. (NYSE: PFE) and Allergan PLC. (NYSE: AGN) merger in 2015, which was found to be solely for the purpose of tax avoidance, the Johnson Controls/Tyco merger is deemed to be primarily business-related. The merger brings together complementary supply chains, product portfolios and customer bases to create a more efficient company with greater global opportunities. However, Johnson Controls, the name of the new company, will also benefit from a much lower tax rate once the merger is completed.
The merger is expected to result in $500 million in overall savings in the first three years and around $150 million in annual tax savings. As of Aug. 4, 2016, Johnson Controls’ stock was trading at $47.77 a share for a year-to-date gain of 16.46%, and Tyco International’s stock was trading at $44.57 a share for a 43.60% gain on the year.
Pfizer and Allergan bust - $160 billion to zero
What would have been the biggest deal of the year, the $160 billion merger between Pfizer Inc. (PFE) and Allergan Plc. was scrapped last minute after a change in U.S. tax law. The change seeks to prohibit Inversion, where companies domicile offshore and avoid local tax bills. The decision was a big win for the Obama administration who had been critical of multinational companies evading U.S. taxes. The merger would have allowed the New York based Pfizer to save an estimated $1 billion in taxes by making its new headquarters in Ireland. (See also: 3 ETFs Affected by the Failed Pfizer-Allergan Merger)
Allergan CEO Brent Saunders said on CNBC that he believed Pfizer and Allergan were singled out, but the ruling would not hinder any possible future activity. "It really looked like they did a very fine job at constructing a temporary rule to stop this deal and obviously it was successful," Saunders said.