A Look into Mergers and Acquisitions within Corporate Finance

This investment writing piece delves into a selection of M&A activity happening recently, particularly in the technology sector, and then evaluates the outlook for companies following this pandemic.

Photo: Credits: Cytonn Photography

Investment

by Subleen Kaur
on 29 January 2021

in Issue 1762

Many companies have shown resilience even during this turbulent period and have managed to take strategic decisions to grow and expand their businesses via acquisitions.

At the dawn of COVID-19, little had anyone anticipated the pandemic to make headlines in the media, overload hospitals, shut down schools, and most gobsmacking of all - give flourishing businesses a run for their money!

If you ever thought that computer geeks (IT folks, simply put) are only good for downloading the antivirus in a Windows PC or figuring out the cables, you might want to revise your thoughts and send the old ones to their timely grave. Following a roller coaster year for mergers and acquisitions, the sectors that observed the most activity were technology, media and entertainment, and telecommunications with over 5000 deals values at US973 $b (up 6% YoY).

As the pandemic shut down cities in the first quarter, companies around the world scrambled to move their businesses online and organise newly remote workforces while plugging holes in their supply chains. Let’s take a look at some of the eye-catching acquisitions that took place this year.

I'm too embarrassed to ask - what is M&A?

Mergers and Acquisitions (M&A) can be defined as the coming together of two companies, where a merger refers to their combinations and acquisition refers to company overtaking the other. Such consolidation is driven by synergistic potential and capability of achieving more together than in isolation. The basic principle is 2+2=5, which as a rule of thumb says that synergy is a business combination. The joint value can be seen either through higher revenues, lowering of costs, or the cost of capital, tax benefits. Tax benefits are looked into where one company realises significant taxable income while another incurs tax loss carryforwards. Acquiring the company with the tax losses enables the acquirer to use the tax losses to lower its tax liability. However, mergers are not usually done just to avoid taxes. Companies that operate in cyclical industries feel the need to diversify their cash flows to avoid significant losses during a slowdown in their industry. Acquiring a target in a non-cyclical industry enables a company to diversify and reduce its market risk. Where benefits are plenty, there are due considerations which must be taken into account. Companies must be willing to take risks and vigilantly make investments as competitors and industry heed quickly. To reduce and diversify risks, multiple bets must be placed to narrow down to the one that will prove the most fruitful.

Salesforce-Slack:

Marc Benioff ensured that 2020 didn’t end on a low note by any means by announcing its purchase of the popular workplace software Slack for $27.7B. The deal brought two Software-as-a-Service (SaaS) giants together, transforming the future of enterprise software and defining the new WFH go-to option for option. Despite its popularity, fierce competition from Microsoft’s Teams and Zoom videoconferencing software was faced, plummeting Slack’s stock price by as much as 40%. With its alliance, the company hopes to regain losses and financial stability.

Marvell Technology - Inphi:

The semiconductor market continued to consolidate at a rapid pace toward the end of 2020 when Marvell Technology announced that it will acquire Inphi in a $10 billion cash-and-stock deal. The two California-based firms will combine to form a chip company worth around $40 billion and plan to focus on building high-performance chips for data centres and 5G wireless infrastructure. Inphi specializes in optical-networking chips, which are most commonly used in cloud data centres and by telcos to power their 5G networking infrastructure. Marvell has historically been strong in similar areas, making the acquisition highly complementary. This is likely to open new gates new opportunities for 5G connectivity and propel growth.

Intuit - Credit Karma:

In February, Fintech giant, Intuit announced that it would be acquiring Credit Karma for approximately $7.1 billion, making it Intuit’s largest acquisition ever. Intuit is a global financial platform company with TurboTax, QuickBooks, and Mint as its flagship products. Intuit’s financial management solutions serve approximately 50 million customers worldwide while Credit Karma is a consumer technology company with more than 100 million members in the U.K., U.S., and Canada with a high millennial user base.

Teladoc - Livongo:

Few industries have managed to completely avoid the carnage wrought by the coronavirus pandemic. One such industry, which has not only managed to avoid the carnage but thrives, is the telehealth industry. The pandemic created a surge in demand for the services offered by companies like Livongo and Teladoc. Before the deal, each company was separately valued at US$8.5 billion, but the cash and stock deal creates a company valued post-transaction at US$18.5 billion. Critics of the deal suggest that Teladoc has overpaid for Livongo and there may be big integration issues ahead for the two companies. But those behind the deal are hoping that the new users of both services added during the pandemic represent a long-term shift inpatient behaviour rather than just a short-time boost to revenue.

Morgan Stanley - E*Trade:

February was the month in which investment bank Morgan Stanley acquired the world’s most popular online trading platform, E*Trade. Retail investors are increasingly investing from their desktops, turning away from the traditional broker-dealer paradigm, so the deal was an obvious move by Morgan Stanley to gain a foothold in that market. With approximately US$360 billion of retail client assets, the acquisition of E*Trade increases Morgan Stanley’s AUM by over 10%. And perhaps even more importantly, the deal nearly triples Morgan Staley’s client database from 3 million to 8.2 million.

2020 has been a challenging year. Amid these tough times, the top priority for corporations has been to keep their employees and businesses safe. However, many companies have shown resilience even during this turbulent period and have managed to take strategic decisions to grow and expand their businesses via acquisitions.