Merger Monday: One Big Deal In, One Big Deal Out

We haven’t seen many “Merger Mondays” recently.  Although merger and acquisition (M&A) activity has been picking up a bit recently, we are nowhere near the heady days when it was routine to wake up on a Monday morning to discover which deals had been finalized over the weekend.  This morning we had two high profile M&A stories: one of which seemed to harken back to the ‘80’s, the other was a breakup.

Like everyone else, it is apparent that M&A bankers want to hit year-end targets.  There were new global deals that amounted to about $40 billion equivalent.  The biggest of them all had a nostalgic ring to it: Nippon Steel (5401, TSE) is buying US Steel (X) for $55 share in cash.  This deal would have caused an uproar had it been announced a few decades ago.  The late ’80s came to be known as the “bubble economy” in Japan.  Flush from a rapidly growing economy and monetary expansion, Japanese firms became active acquirers of global assets.  There was a bit of paranoia that “Japan Inc.” was going to usurp American corporate might and buy up trophy assets in the process.  The latter fear may have been true to some extent; the former proved overblown.

In those days, had the largest steel company in Japan struck a deal to buy its flagship American counterpart, the hue and cry would have been dramatic and unrelenting.  Today, it is an important business story, but strictly because its $14 billion size culminated an auction process that put X up for sale recently.  People might have freaked out if the buyer was Chinese.  Times have changed. 

There is still a relatively wide spread between the $50 where X is currently trading and the $55 deal price.  If the merger is completed by the end of the third quarter, as proposed in the agreement, that would yield over 10% return.  The spread tells us that there are concerns either about the deal’s approval or items that could delay its timing.  Among other things, the Steelworkers Union is asking regulators to scrutinize the deal.  That can introduce uncertainty into what seems like a cut and dried agreement. 

In the other major piece of M&A news, Adobe (ADBE) terminated its proposed acquisition of Figma.  If an agreed-upon deal breaks, it can have huge consequences.  When the acquiree is a public company, a broken deal causes its stock to plummet.  Investors lose money in those circumstances.  When the acquiree is privately held, like Figma, there are few public ramifications.  In this case, ADBE will be paying Figma a $1 billion breakup fee and ADBE’s stock has risen by 2%.  (FWIW, I’ll take $1 billion to go away.) 

The stated reason for ADBE’s decision is that the companies became concerned that European regulators offered no path to its ultimate approval.  I have no choice but to take their word for it.  Meanwhile, analysts have upgraded ADBE today on the basis that ADBE will still remain a dominant company and that $1 billion is a fair price to exit an expensive deal.  This is the second time that we have seen a huge company rally after ending a deal.  Remember that Cigna (CI) rallied over 16% last week when they announced that rather than trying to acquire Humana (HUM), they would initiate a large stock buyback. 

Bottom line, in this environment M&A is good news when it happens and also can be good news when it doesn’t.