By Nina Trentmann
Finance chiefs in pursuit of mergers and acquisitions are facing
high asking prices and strong competition from other deal makers.
Some are seizing the opportunity nonetheless, while others are
Executives so far this year have struck 1,270 deals involving
U.S. companies, down from 1,665 during the same period in 2020, but
spent more than three times as much on these acquisitions,
according to Dealogic, a data provider. Buyers shelled out $321.16
billion on M&A involving U.S. targets through Tuesday, up from
$103.06 billion a year ago, Dealogic said.
Company leaders said they are looking for transactions to
accelerate growth and position their businesses for a post-pandemic
world. But high stock-market valuations, low borrowing costs and
the rising number of special-purpose acquisition companies are
contributing to an increase in prices, a trend that began showing
Multiples for global deals, calculated as the ratio between
median enterprise values and earnings before interest, taxes,
depreciation and amortization, rose to 14 times in 2020, up from 13
times in 2019, according to Bain & Co., a management consulting
firm. Valuations increased in sectors such as technology,
telecommunications, digital media and pharmaceuticals, while they
declined in others, such as retail and energy, Bain said. The
overall uptick is in contrast to the financial crisis in 2008 and
2009, when deal multiples cratered by about 30% over two years,
according to Bain.
"It's more difficult than it's been in a while to execute
deals," said Glenn Schiffman, the chief financial officer of
IAC/InterActiveCorp., a conglomerate known for its acquisitive
bent. "Asset prices have gone up, there is more competition,
including from SPACs," he said, adding that IAC is scouting the
market for businesses that would expand its portfolio of internet
Network equipment provider Cisco Systems Inc. also is interested
in deal making, but not any price, finance chief R. Scott Herren
said. "Valuations are crazy," he said, adding that he doesn't
expect a reset any time soon. Finance chiefs shouldn't just buy for
the sake of adding revenue to their income statement, but find a
business that fits their company strategy, Mr. Herren said.
Payments network Visa Inc., whose acquisition of data aggregator
Plaid was called off in January after an antitrust lawsuit from the
Justice Department, also said it is looking for opportunities, in
addition to investments in its existing business.
"It may be that we are in an environment where certain sellers
have unrealistic expectations," said CFO Vasant Prabhu, adding that
Visa would stay disciplined. "I still think that things can be
done," he added.
But other companies, including Qualcomm Inc. and Eaton Corp.,
continue to announce new purchases. Last month, Qualcomm said it
would spend about $1.4 billion on Nuvia Inc., a startup developing
central processing unit chips that Qualcomm is expected to
integrate into its products. "It's definitely an expensive
acquisition, but we felt the value on the balance was worth the
price," finance chief Akash Palkhiwala said.
Acquiring Nuvia will help Qualcomm boost performance and power
efficiency for 5G internet, the company said. Qualcomm will
continue to look for smaller acquisitions, Mr. Palkhiwala said,
adding that larger deals would be opportunistic.
Eaton, a power management company based in Dublin, in late
January agreed to buy Tripp Lite, a provider of power and
connectivity solutions, for $1.65 billion. Just days later, it said
it had struck a deal to acquire Cobham Mission Systems, a
manufacturer of air-to-air refueling systems, for $2.83 billion.
"Those deals came together fairly quickly," the company's CFO,
Richard Fearon, said.
Eaton will pay for these two acquisitions with cash on hand and
proceeds from a recent divestment, Mr. Fearon said. The executive,
who has completed more than 70 acquisitions since he took over as
Eaton CFO in 2002, said the purchases are advancing the company's
At consumer foods company Kraft Heinz Co., CFO Paulo Basilio is
benefiting from high valuations. Last week, the company said it
would sell its nuts business to Hormel Foods Corp. for $3.35
billion in cash. The proceeds of this and other divestments could
be spent on acquisitions, alongside investments in the current
business, Mr. Basilio said.
Still, many deals aren't making it to the finishing line. "There
are a lot of deals that don't come together, and valuations are
part of that," said James Marshall, a principal advising corporate
M&A teams at PricewaterhouseCoopers, a professional services
Eaton's Mr. Fearon said executives need to be prepared to walk
away from transactions that look overpriced or not worth the
trouble, adding that his company has done so during the past 18
"We walk away for a variety of reasons, if the price isn't
right, or if the terms aren't right," he said. "No deal is better
than a bad deal."
Write to Nina Trentmann at firstname.lastname@example.org
(END) Dow Jones Newswires
February 17, 2021 09:44 ET (14:44 GMT)
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