As rising interest rates increase the cost of borrowing and market volatility creates fears of a sustained “risk-off” environment in investing, you may think investors have meager expectations for any big deals in 2019.
However, a recent Morgan Stanley report on merger and acquisition (M&A) trends noted that 2018 marked the fifth consecutive year above $3 trillion in annual mergers and hinted 2019 will be more of the same. Furthermore, mega-deals, including the $54 billion purchase of Express Scripts by Cigna Corp.
and the pending $26 billion merger between Sprint Corp.
and T-Mobile US
show that corporate America isn’t scared of making deals after a decade of rising stock prices.
There is a lot of potential for more multibillion buyouts in the year ahead, too. Here are 10 such mega-deals investors would love to see — though, admittedly, some are more likely than others.
1. CBS should buy Viacom
It didn’t take long after CBS Corp.
and Viacom Inc.
parted ways in 2006 for some investors to second-guess the move. In an age of cord cutting and digital disruption of media, the split divided the pair at a time when they needed each other’s strength, as evidenced by tense carriage fee negotiations between Viacom and DirecTV that resulted in channels like Nickelodeon and Comedy Central briefly going dark on the cable provider in 2012.
The pair already has been rumored to be discussing a merger, but thanks in part to a scandal surrounding CEO Les Moonves in 2018, that deal was impossible to pull off last year. The Redstone family, which remains a key shareholder in both entities, has made clear their desire to reunite the two companies, however, and it seems like only a matter of time before the deal happens.
2. Boeing should buy SpaceX
OK, so SpaceX would be a big pill to swallow given that its valuation was recently estimated at over $30 billion after the company raised $500 million in new funding late last year. Furthermore, it’s a tall order to expect founder Elon Musk to ever give up the reins. However, it’s undeniable that the ambitions of SpaceX — including its Starlink satellite internet service as well as its better-known commercial spaceflight efforts — require some serious capital to continue on the road to reality.
Allowing current equity holders to cash out and instead relying on the deep pockets of entrenched aerospace giant Boeing
may be both good for the growth potential of Boeing and good for the viability of SpaceX.
3. Alphabet should buy Splunk
isn’t exactly known for being behind the curve on next-generation internet trends, but its Google Cloud offering has been left in the dust as Microsoft Corp.
and Amazon.com Inc.
consolidate power in the space with their Azure and Amazon Web Services lines, respectively.
Google simply cannot cede the cloud infrastructure war and admit such a public defeat by its rivals in big tech. That means the easiest path to relevance (or at least to shareholder appeasement) is the injection of talent and customers via the acquisition of fast-growing data stock Splunk Inc.
4. Pfizer should buy Allergan
At over $45 billion in market capitalization, Allergan plc
is no small potato. However, as January’s $74 billion buyout of Celgene
by Bristol-Myers Squibb
proves, that value is hardly a barrier. In fact, Pfizer made a bid to acquire Allergan for $160 billion back in 2015, which would have created the world’s largest drugmaker at that time if regulators hadn’t balked at the deal.
Allergan’s fortunes have taken a tumble since then, in large part because of competition for its blockbuster Botox products. But Pfizer was looking for much more than a tax inversion and the Botox brand in its bid for Allergan. There were also cost-cutting efforts sure to lift earnings and a deep portfolio of branded and biosimilar pharmaceuticals. Given the rollback in Allergan stock and the fact that much of the due diligence is already done, it’s logical for Pfizer to simply write the next chapter in Big Pharma consolidation with this deal.
5. Facebook should buy Snap
has already pretty much obliterated Snap Inc.
by imitating the stories and filters of Snapchat on Instagram. But as Snap stock struggles and trades for less than $10 billion, it may not be crazy for Zuckerberg & Co. to cook up a stock-heavy deal. After all, WhatsApp’s founders were awarded a cool 116 million shares after a massive 2014 deal with Facebook — a value of about $9 billion at the time and now close to $20 billion.
Snap may not be profitable yet, but it has some smart developers to suck up via an “acquihire.” Furthermore, Snapchat is undeniably younger and could inject youth into the ecosystem. And at a time when some fear the bloom may be off the rose at Facebook, owing to recent concerns about privacy and fake news, creating some different headlines may be a benefit in and of itself.
6. Oracle should buy Salesforce
While the IBM
acquisition of Red Hat for $34 billion was a pretty big deal, Big Tech is overdue for a the kind of mega-mergers that happen in energy, consumer goods and pharmaceuticals. And what better place for such a blockbuster deal than in enterprise tech, with the marriage of frenemies Oracle Corp.
Salesforce co-founder Marc Benioff is an Oracle alum with an ax to grind, and there’s no love lost between the two companies. But Salesforce has nothing to prove anymore, and in the increasingly cutthroat world of business software, there may be a big benefit to a merger of equals. The Salesforce subscription sales model is old news and it has increasingly relied on acquisitions to grow and fend off competition. Why not simply consolidate power and enjoy the view from the top?
7. Tesla should buy BMW
Another merger of equals that could be just crazy enough to work would be a mash-up of dynamic electric-vehicle company Tesla Inc.
and luxury-car maker BMW
The BMWi sub-brand has been pushing plug-in vehicles since 2011 and is no slouch in this budding market; based on figures from last summer roughly 7% of the company’s total U.S. sales volume includes cars with a plug.
Given the luxury status of Tesla’s Model S and Model X vehicles and the zeitgeist around all things Elon Musk, the driving public would obviously bristle at a partnership with an old-school firm like General Motors
But this marriage of two high-quality and respected names could be a net positive for both sides. And with a market value of around $50 billion for each company, the deal would be complex but not impossible.
8. Amazon should buy Netflix
No, really! First, there are only a few companies big enough to afford Netflix Inc.
and Amazon is one of the few. Furthermore, Amazon has already plowed plenty of capital into developing original content for its Prime Video services, so imagine what it could do with access to the Netflix algorithm and its in-house creative talent. And imagine the pricing power Amazon would have after it eliminates one bidder and doesn’t have to pay for content licensing twice.
And after you wrap your head around that, imagine Amazon using the purchase to justify a modest 20% bump in its annual Prime membership fees. Or better yet, to spin off a stand-alone over-the-top service incorporating its Twitch video-game streaming. Industry surveys show Prime customers derive most of their value from the shipping and shopping benefits, so it would be a great way for Amazon to maximize value for shareholders from its substantial content operation without upsetting its core e-commerce engine.
9. Canopy Growth should buy Cronos
Leading marijuana stocks Canopy Growth Corp.
and Cronos Group Inc.
are ramping up again; CGC is up almost 90% since its October lows and CRON is up more than 250% in the same period. And given legalization of recreational pot in Canada, where both firms are located, and the very clear trend toward legalization of marijuana in the U.S., it seems like the optimism is justified.
One path forward would be for both companies to continue to grow independently. But joining forces could help consolidate power in the field to create a clear front-runner. And with deep-pocketed legacy companies already involved, including Constellation Brands
plowing $4 billion into Canopy and Altria
making a $1.8 billion investment in Cronos at the end of last year, let’s not pretend these are independent upstarts anymore. Corporate America already has its fingers in the field, and now may be the time to make a deal before valuations get out of hand.
10. Pepsi should buy Mondelez
Rumors of this mega-merger have floated around since 2017, when a Stifel analyst proposed the possibility in a Barron’s interview. And almost two years later, the deal is looking more and more logical as both PepsiCo
and Mondelez International
look to enter the next chapter of their corporate existence in a world of healthier foodstuffs and changing consumer tastes.
Both are global powerhouses with a staggering array of products; Pepsi brands include Lay’s potato chips, Quaker oats and Tropicana orange juice, while Mondelez boasts hits like Oreo cookies, Cadbury confections, Halls cough drops and Philadelphia cream cheese. While many of these brands have undeniable appeal, it’s hard to see where some of them fit in. Merging the two companies would provide a great opportunity for a hard and comprehensive look at the overall brand portfolio and corporate structure of a combined entity, which could then spin off or divest what doesn’t make long-term sense.
It also would be wise to look at foods giant Kraft Heinz
as a blueprint. Kraft spun off Mondelez in 2012, and promptly joined forces with Heinz in 2015 and then in 2017 bid a staggering $143 billion for Unilever
That restructuring and deal-making may increasingly be what shareholders ask for to keep the firms from falling behind the curve.