Recent data from Bloomberg showed that deal volumes have greatly picked up, with November seeing more acquisition activity than any other month this year.
Early in the spring of 2020, deal activity all but came to a halt. However, things seem to have turned around as companies worldwide have announced $760bn worth of takeovers thus far in this fourth quarter alone. This is the highest number seen for the period in the last 4 years.
There could be a multitude of reasons for this resurgence. Some companies might be trying to buy businesses that have a lower valuation due to the year’s circumstances. An example of this is Progress Software’s acquisition of Chef, a company that was valued at $360 million during its last round of funding in 2015, for $220 million earlier this year. Chef has faced a hard time in maintaining momentum in the highly competitive space of open-source DevOps tooling. Other companies might be attempting to strengthen their operations due to the COVID-19 driven downturn. This strategy is currently popular amongst European banks. For instance, consolidation in the Spanish banking sector has been on the rise to bolster local lenders that were hit by the pandemic and allow them to combine revenues and cut duplicate costs.
There is also the possibility of companies accelerating their activity by reinforcing their offerings as breakthroughs in developing a COVID-19 vaccine ameliorate the global economic outlook. This can be seen in S&P Global’s $39 billion takeover of IHS Markit to create a behemoth in the financial information market. Otherwise, the reason could be independent of the pandemic and instead be a situation of companies sticking to their strategy of acquiring skill and knowledge which they do not possess. Arguably, this is what Facebook is doing in its acquisition of Kustomer to expand into customer service tools, and, Salesforce is doing in its acquisition of Slack, a workplace-communications platform.
It will be interesting to note the effect these recent acquisitions will have on the ebb and flow of various stock markets. Generally, the target company’s share price tends to spike, aligning it closer to the price of the deal. The share price of the acquiring company, on the other hand, tends to fall temporarily. This may be attributed to the company incurring debt to finance the deal, paying a premium for the target company, or even soft issues such as the challenges that come with post-acquisition integration. This microcosm is a reflection of the risk the acquiring company is taking.
