President Donald Trump introduces Broadcom CEO Hock Tan prior to Tan announcing the repatriation of his company’s headquarters to the United States from Singapore during a ceremony in the Oval Office of the White House, in Washington, DC, November 2, 2017.
Broadcom’s $103 billion unsolicited offer to buy Qualcomm on Monday was just the latest in a recent binge of large transactions underway or being contemplated as Wall Street reboots its deal-making engine.
Also on Monday, CNBC reported that Walt Disney Co. had talked to 21 Century Fox about acquiring its film studio and television production operations. Last month, CVS Health was said to be mulling a deal the insurance giant Aetna, a move believed to be spurred by possible competition from e-commerce giant Amazon.com in the pharmacy industry.
Industries from technology, media and telecommunications to health care are being pushed by irreversible shifts in consumer behavior and fierce competition from technology-savvy competitors. With market valuations at all-time highs and interest rates low with plenty of financing available, company managements are springing to action.
Bankers and lawyers who advise on transactions say three years of low growth have left corporate CEOs thirsty for bold transactions that add scale and boost their companies’ bottom lines. Greater clarity on the prospect of lower corporate tax rates and a general sense that the Trump administration won’t be as aggressive on anti-trust issues as regulators during the latter half of the Obama years, are also making conditions ripe for deals.
“It looks like everyone is on the same page,” said Chris Pultz, the portfolio manager of merger arbitrage strategies at Kellner Capital.
Prior to Monday, the biggest deal in the U.S. this year was United Technologies’ $30 billion bid for Rockwell Collins, announced in September, according to data from Dealogic. Emerson Electric’s $28.9 billion bid for Rockwell Automaton was announced last week.
Broadcom’s bid for Qualcomm would be the second-largest M&A deal on record and the largest in the technology sector, Dealogic said. And a CVS-Aetna tie up could be among the biggest in the healthcare sector.
The two blockbuster deals, should they make it to the finish line, broke a logjam of merger activity that had cooled off since last year as companies waited to see what would happen under the Trump administration. A downturn in M&A usually signals a gain in the S&P 500 the following year, according to S&P Global Market Intelligence.
In four of the last five M&A slumps —2002, 2008, 2009 and 2012 — the S&P has notched an average gain of 22.8 percent the following year, according to S&P data as of November 3. M&A deal proceeds fell 15 percent last year, and so far the index has climbed 15.6 percent this year.
Momentum for dealmaking picked up in the fall. Last month, Goldman Sachs CFO Martin Chavez said on a conference call with analysts to discuss earnings that the firm’s bankers lately were fielding more inquiries from companies. “We’re seeing a pickup in client dialogue, particularly, I would note, in technology media and telecoms as well as industrial and natural resources.”
High CEO confidence and positive market conditions means managements aren’t waiting to see the outcome of the tax legislation to make a move, he said. “Clients, it seems to us, have moved towards saying well, tax reform would be a good thing but it’s not stopping us from considering strategic acquisitions and sales right now.”
Another recent uncertainty was solved when President Donald Trump’s nominee to head the antitrust division of the Department of Justice got confirmed by the Senate in late September. Makan Delrahim, a corporate lawyer who in years past has advised AT&T, Google, Qualcomm and other tech giants, takes his new job as Trump’s top anti-trust cop as the department continues to review AT&T’s $85 billion acquisition of Time Warner.
Regardless of the outcome of the AT&T review — Trump criticized the deal on the campaign trail last year — company CEOs are seen as less worried about being singled out as the anti-trust poster child, lawyers said.
Trump also recently nominated an anti-trust lawyer, Joseph Simons, to take the top job at the other anti-trust regulator: the Federal Trade Commission, where the permanent seat hasn’t been filled for 10 months.
“Although they won’t say it, people like what they see” in the current administration, said Steven Davidoff Solomon, a law professor at the University of California.
Pent-up demand from private equity could be a final reason behind the burst of large-deal activity. S&P Global Market Intelligence recently said funds have raised nearly $1 trillion from investors.
Navid Mahmoodzadegan, a co-president of the merger advisory firm Moelis & Co., said during an earnings conference call in October that private equity firms have to put this money to work. “They’re in the business of buying companies even in markets where there’s a perception that prices are expensive, and obviously there’s ample credit available to buy companies and buy companies of scale.”