By Dana Mattioli
Investment bankers have gotten used to being asked by worried
retail-industry chief executives to pitch takeover ideas aimed at
fending off Amazon.com Inc.
Now the fear has spread to media, health care and many other
sectors, where CEOs dread the breathtaking competitive advancements
made by not just Amazon but also Facebook Inc., Alphabet Inc.'s
Google and Netflix Inc.
The result is an explosion of mergers and acquisitions. So far
this month, about $200 billion of deals have been announced in the
U.S., according to Dealogic. November is on pace to be the
second-biggest deal-making month since the firm began tracking them
in 1995.
Three recent deals, either under discussion or awaiting
approval, show in especially dramatic fashion the impact of Amazon
and other technology giants on M&A activity.
CVS Health Corp. could reach a definitive agreement by the end
of November to buy Aetna Inc. for more than $66 billion, uniting
two businesses with little operational overlap, according to people
familiar with the timing.
The possibility that Amazon could enter the pharmacy business
jolted CVS executives toward buying a health insurer, which could
help CVS make better use of its retail space, people familiar with
the matter said. The drugstore operator could sell insurance, draw
blood and provide other services that Amazon can't easily
replicate.
AT&T Inc.'s planned purchase of Time Warner Inc. for about
$85 billion would combine a huge but slowing mobile-phone business
and the DirecTV satellite-television operation with a content
machine that includes Time Warner, the owner of CNN and HBO.
Randall Stephenson, AT&T's chief executive, said the point
of the AT&T-Time Warner deal is to create a bulwark against
Facebook and Google, which have built "incredibly strong" positions
in the advertising market. "That's what this is about," he said at
an event sponsored by the New York Times.
In a statement to The Wall Street Journal, he added: "Tech
companies are spending billions creating content and distributing
it directly to consumers." AT&T's planned purchase "gives Time
Warner the opportunity to do the same, across multiple platforms
and with ad-supported models that cost consumers less."
Here comes Netflix
Walt Disney Co.'s expression of interest in a big chunk of 21st
Century Fox Inc.'s assets was prompted in part by the success of
Netflix, the fast-growing streaming video company, according to
people familiar with the situation. Fox has a stock-market value of
about $57 billion.
Disney's cable channels are under pressure from cord-cutting. In
August, the company announced it will launch two online
subscription streaming services with sports, movies and TV
programming directly to consumers. Disney said it would yank its
future movies from Netflix.
In the fall, Disney approached Fox about a potential deal that
would provide Disney with more content and distribution assets to
better compete against Netflix. (Fox and News Corp, the Journal's
parent, share common ownership.)
"Our goal here is to be a viable player in the
direct-to-consumer space, space that we all know is a very, very
compelling space to be in," Disney Chairman and CEO Robert Iger
told analysts and investors this month.
The Disney-Fox talks stalled, but they appear to have unleashed
a wider auction for Fox assets, including its movie studio and
international unit. Those assets have drawn interest from Comcast
Corp., Verizon Communications Inc., Sony Corp. and possibly other
potential buyers, according to people close to the discussions.
Every M&A cycle looks different. The boom that crested in
2015 was largely defined by deals between direct competitors trying
to gain scale and cut costs. Some firms wanted to lower their taxes
by moving their headquarters outside the U.S. as part of a
deal.
The number of deals that were agreed to and valued in the
double-digit billions of dollars broke records. The signature deal
of that era was the megamerger, such as Pfizer Inc.'s agreement to
buy Allergan PLC for about $150 billion. The Obama administration
later blocked the deal between the two drugmakers.
Before the financial crisis, leveraged buyouts dominated the
deal environment. During the turn-of-the-century tech surge,
companies rushed to make deals that were seen as offensive moves to
launch them into new lines of business, like the ill-fated merger
of AOL and Time Warner.
So far this year, the dollar volume of U.S. mergers totals $1.22
trillion, down 18% from the same period in 2016, according to
Dealogic. Investment bankers attribute the decline largely to
uncertainty surrounding federal antitrust and tax policy.
Big and bigger
The recent surge is a sign that other drivers of deal activity
are now in control. Debt remains readily available and cheap, and
high stock prices often go hand-in-hand with mergers and
acquisitions. Shareholders have rewarded buyers in a number of
recent deals, which tends to encourage more and is reminiscent of
2015.
The biggest deals in the current crop are every bit as big as
those from the last boom. Earlier this month, Broadcom Ltd.
launched an unsolicited offer for rival chip maker Qualcomm Inc.
valued at $105 billion. It would be the biggest technology takeover
ever. Qualcomm rejected the offer and said it undervalued the
company.
It's still hard for many companies to agree to a merger or
takeover, let alone win approval from shareholders and regulators.
Sprint Corp. and T-Mobile US Inc. recently abandoned their
monthslong effort to combine the third- and fourth-largest wireless
carriers in the U.S. Disagreements over control and other issues
doomed the talks.
Time Warner shares have tumbled since the Journal reported that
the Justice Department could sue to block the AT&T deal.
Still, interest in deal-making is strong and growing at many
companies where competition from technology giants such as Amazon
looms.
Those tech giants have done few big deals themselves lately,
with the exception of Amazon's purchase of Whole Foods Market Inc.
in August for roughly $13 billion.
Investment bankers who advise grocery chains say they were
flooded with phone calls after the Whole Foods deal was announced.
Amazon's ability to essentially enter the business overnight sent
shivers through an industry already plagued by razor-thin profit
margins. CEOs in other sectors wondered if theirs would be next. An
Amazon spokesman declined to comment.
"I see it across nearly every industry," says Steven Baronoff,
Bank of America Merrill Lynch's chairman of global M&A. "These
companies are causing CEOs to realize that maybe their stand-alone,
status-quo option is not as viable."
Few analysts or investors saw it coming when the Journal
reported in October that CVS was in talks to buy Aetna.
CVS has a vast network that includes more than 9,700 retail
locations, more than 1,100 walk-in medical clinics and a
pharmacy-benefit operation that serves as a middleman between drug
companies and insurers. Aetna is one of the largest health insurers
in the U.S.
Amazon looms
Fear of increasing competition from Amazon helped spur CVS to
look far afield for a merger partner, according to people familiar
with the matter.
Amazon wasn't the only impetus. CVS sees Aetna as a way to
reshape the retailer amid a broader shake-up of the health-care
industry and bolster the combined company's leverage in
negotiations with drugmakers while giving it a precious stockpile
of health data.
CVS had begun weighing a possible transaction with Aetna before
a CNBC report suggested in May that Amazon was considering entering
the pharmacy business, people familiar with the matter said.
As more shopping moves to Amazon and other online retailers, CVS
already was wrestling with what to do with its stores. The
possibility that Amazon could become a rival in CVS's main business
increased its desire for a deal that would diversify the company
further and help repurpose its drugstores, the people said.
CVS's board told management to size up the potential effect of
Amazon's entry into the pharmacy business and devise a
counterattack, people familiar with the matter said. Separately,
CVS's marketing department and outside advisers considered whether
a partnership with Amazon would make sense. That analysis concluded
that an alliance was unlikely due to Amazon's historical resistance
to such deals.
Other parts of the health-care industry are feeling the heat
from Amazon, too. Health-care services companies long thought they
were largely immune to threats from Amazon, but the e-commerce
company began adding such supplies to its website a few years
ago.
Tongue depressors
After starting with low-margin surgical gloves, tongue
depressors and other items, Amazon now sells the top 20 basics that
every doctor or dentist needs, says Jim Forbes, vice chairman in
investment banking at UBS Group AG.
He says some health-care services companies have begun to
explore ways to diversify into different lines of business,
including M&A deals, as a result of pressure from Amazon.
Carl's Jr. has a cheeky, if-you-can't-beat-them-join-them
attitude about Amazon. The fast-food chain, owned by CKE
Restaurants Holdings Inc., tweeted last month: "HEY @Amazon BUY US.
Srsly. For real. Let's do this. Let's change the future of eating!!
#AmazonBuyUs."
There are no signs that Amazon is interested in acquiring Carl's
Jr.
--Sharon Terlep and Drew FitzGerald contributed to this
article.
(END) Dow Jones Newswires
November 20, 2017 13:08 ET (18:08 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.