The Good, the Bad, and the Baby Formula Shortage
Analyzing Post-Pandemic M&A Trends, 2021 was the single largest year for mergers and acquisitions (M&A) ever and maybe forever. $5.9 trillion USD was amassed between roughly 60 thousand deals, — $2.68 trillion USD greater than that of 2020. A comparatively shy $1.67 trillion USD was brought in between mergers and acquisitions in the first two quarters of 2022, though predictions for the second half of 2022 show no real signs of slowing down.
Why care? With the impact on our personal lives not becoming apparent until catastrophe strikes, analyzing the strategy behind firms’ M&A decisions allows us to better predict and prepare for shifts in the corporate world. Even in its greatest value, the magnitude of most M&A isn’t always so overtly observable, such as Broadcom’s $61B acquisition of VMware (who? Right.) Though it is much harder to ignore the empty shelves of baby formula across the United States — a result of obsessive industry consolidation among other things. Looking at both positive and negative manifestations of 21st century M&A trends we will dive into industries — the thriving and the monopolized — and why the Rogers service outage prevented you from buying your Friday morning coffee, the one that you really… really needed.
How we ended up here
Firstly, we must wonder; how did we end up in this hot M&A market? Similar to most economic and strategic trends of recent years, we look to 2020. The rather indescribable nature of the COVID-19 economy lent itself to a both impatient and volatile market – generating a lot of pent-up demand for buying and selling. As firms looked inwards towards resource, economic, and strategic uncertainties, they responded by looking towards each other. The buy-over-build as a solution took over. With M&A in mind, deal makers were further drawn to the programmatic (M&A) approach, and specifically its outperformance to other, flashier, approaches. The approach entails smaller and rather frequent or cyclical deals as opposed to suspenseful or show-stopping transactions. 20 years of M&A data from McKinsey reveals this “carefully choreographed” approach consistently generates the most value through economic downturn. When compared to all other approaches, programmatic acquisition was the only approach that displayed any excess total returns to shareholders (2 percent between 2010 and 2019). With this foundation of knowledge companies were able to strategically execute their M&A transactions at maximum value throughout the COVID-19 pandemic. Resultingly, pragmatic acquirers demonstrated a 2.9 percent excess total return to shareholders where all others sat at or below zero.
Positive Manifestations of these trends
2020 and the pandemic ushered in the era of movies, gaming, binge-watching, and all things at home entertainment. In M&A this manifested in the $43 billion USD blockbuster merger of Warner Media and Discovery Inc which closed recently, on April 8th, 2022. We can expect the new union’s strategy to continue capitalizing on the direct-to-consumer channel that now owns both HBO Max and Discovery Plus subscription services. The media & entertainment industry has evidently birthed some of the greatest M&A deals of the late pandemic era which can be explained by the comprehensive strategic and portfolio reviews 92 percent of entertainment companies undertook in 2020. These surveys revealed the buy-over-build mindset, once again fuelling market growth opportunities in acquisition.
The entertainment roar comes in just behind the tech boom which can be accredited to symptoms of the pandemic such as everyone ranging from the average Joe to multi-billion-dollar corporations looking to elevate their tech capabilities and bring them in-house. Investment in digital strategy, cloud platforms, and app modernization is the beginning of a long list of technological features demanded of every corporation navigating the pandemic. The numbers paint a pretty picture, where tech M&A landed $79 billion USD in transactions in 2021, twofold the 2020 income.
And the Negative
But let’s be real, M&A isn’t all rainbows and sunshine, or the vehicle for the next HBO show to binge watch. The dangers of these fast-growing companies are all around us — though as aforementioned aren’t overtly observable, or predictable. We were reminded of this on Friday July 8th, when a Rogers service outage directly impeded more than 12 million Canadians from using Wi-Fi and cellular, which when extrapolated prevented customers and non-customers from contacting loved ones, colleagues, and even emergency services, while simultaneously halting financial payments across several payment channels. According to the unseen complexity of Rogers’ many subsidiaries, numerous infrastructures are dependent upon Rogers for connectivity. The outage comes amid Rogers’ move to merge with Shaw Media; the pair being two of the five telecommunication companies occupying 90 percent of the Canadian telecommunications market. The mega-deal raises concerns for Canadians and the Competition Bureau alike.
While it looks different on the surface, the United States is facing a nearly identical problem in supply chain malmanagement. Plant closures, labour shortages, and formula recall exposed the reality of a monopolized (speculative) industry when shelves of infant formula went bare for weeks. American President Joe Biden launched an FTC investigation into pharmaceutical suppliers to uncover manufacturers’ buying and selling habits, potentially those keeping product from smaller retailers. The spotlight is on Abbott, Perrigo, Nestle, and Mead Johnson pharmaceuticals, four companies which occupy 90 percent of the baby formula market. A breakdown identical to this to exist in the Canadian telecommunications market should the Rogers-Shaw merger take place.
Between Friday’s phone fallout and the heartbreaking scramble for infant formula, it becomes clear the industries heading down a dark, consolidated, and monopolistic path. What amount of unity is empowering, and when has it gone too far?
What is the future of M&A facing?
In predicting future direction, alike all other markets, inflation is the elephant in the room. Specifically, valuation is put into question as inflation and interest rates negatively affect M&A financing measures such as debt leveraged buyouts, asset divestment, investment return rate, and others. And should we anticipate rising inflation/interest rates in the long-term, we will see a proportional increase in the cost of production and operations - squeezing out excess cash for said M&A financing. As corporations evaluate alternternative capital structures to save pennies; the build, or conservative restructure and restrengthen, may begin to supersede buy.
From an M&A regulatory standpoint, and with respect to the big-pharma and Canadian telecommunications cases mentioned, the future of nearly monopolized markets lays in the hands of the FTC and Canadian Bureau (respectively). To date we are waiting on reports from the two regulators and there is only so much the public, or even entangled subsidiaries can do. What we can do is strive to better understand and predict M&A trends within industries — the thriving and the monopolized. Because who knows what resource could be gone in the morning.