Suddenly, every high-powered exec in corporate America wants to sign off on an acquisition -- big or little -- and that could mean the stock market is nearing a peak.
Microsoft (MSFT) for Salesforce (CRM)? Weren't Oracle (ORCL) and founder Larry Ellison rumored to have interest in Salesforce last week? Google (GOOGL) for Twitter (TWTR)? Or maybe that was Apple (AAPL) for Twitter, seeing how a purchase of the modern-day news agency with no editing team would provide valuable real-time consumer insights. By all means, Apple, stalk my whining First World-person tweets on the slow delivery of the Apple Watch -- I welcome the chance for you to learn from my annoyances.
But seriously, it seems as if a day hasn't gone by in the last month where there aren't rumored to be seriously transformational acquisitions in all sorts of sectors. Can't say seeing even more M&A deals announced on a Sunday evening (always the case) would be a shocker as execs attempt to lock in super-low cost financing before the Fed begins lifting rates, likely spooking the debt markets in the process.
Based on my conservations with CEOs this earnings season, they are beginning to ponder paying sizable premiums to acquire tuck-in businesses -- those that fill a specific need -- or huge businesses from which to extract synergies or move into adjacent categories. According to Dealogic, there were 14 announced transactions valued at more than $10 billion in the first quarter. The deals pushed the total value globally to $902.2 billion in the quarter, up about 23% year over year.
Here is what I am hearing:
Consumer products companies: A standard question I have been asking execs this earnings season is, "Which lagging business are you seeking to chop off to appease investors and thwart activist attempts?" Obviously, that isn't my precise approach, but you get the gist. I have been very surprised by the responses by execs in the space -- mainly that they are on the hunt for all types of acquisitions. These consumer giants of supermarket shelves, notorious for slow growth, want to grow -- and do it very quickly.
Consumer products are favoring, first, an acquisition that could give them exposure to areas in health and wellness. Usually these will be small, privately held companies that the larger company could scale up to global distribution and with new products, and then throw big marketing dollars behind. So you are unlikely to be able to invest in the names that are being aggressively reviewed by consumer products deal teams. On the other hand, for the first time in a while, I sense consumer products companies want to play a Berkshire/3G Capital in making a splashy, debt-funded purchase in order to extract cost synergies from businesses with slow top-line growth.
Sensing this has made me wonder if execs are getting concerned on missing out, which in turn has me wondering if equity valuations have become too overheated.
Retailers: I think there are at least two companies that could do deals before the end of the year. The first is Under Armour (UA), mostly to enhance its burgeoning mobile health platform -- especially as the Apple Watch will be the gift of choice this holiday season. Under Armour, in my view, is overpaying for some of these low-barrier-to-entry mobile businesses, which is yet another sign of an overheated equities market.
VF Corp. (VFC) is likely to venture back into the acquisition market soon. And a deal could be significant-- the company has the appetite to leverage up its balance sheet, views acquisitions as a top priority, and is in active discussions with numerous companies. I still think a VF Corp. could buy Lululemon (LULU) to gain access to a market it's not truly playing in at the moment.
I would set aside a block of time to review the EBIT multiples on recent acquisitions -- compare them to other transactions in the sector from the past year and historical norms. If my intuition is correct, you will likely see EBIT multiples that are inching higher and, in many cases, don't make a great deal of sense given the long-term outlook for the business. And when you see that ... it's time to raise the holdings of cash in the portfolio.
In an earlier version of this story, Larry Ellison was incorrectly identified as Oracle CEO. He is now chief technology officer of the company. Safra Catz and Mark Hurd are CEO of Oracle.