Actionable Ideas for Companies and Sponsors
Stock-for-stock transactions as a hedge against volatility and risk
The M&A market remains challenged by dislocation relating to the failure of SVB and the continuing overhang of interest rate uncertainty, the possibility of recession and ongoing geopolitical tensions extending from the Russia/Ukraine conflict to China and North Korea. Any one of these factors alone would have a negative impact on M&A, and this cocktail of concerns has substantially dampened activity; the volume of announced transactions in January 2023 was the lowest in two decades and represented just one-third of the announced transactions in January 2022.
Notwithstanding these headwinds, pockets of activity and structures which can be used to mitigate risk remain. Stock-for-stock transactions remain an effective means of reducing risk and equilibrating valuations in periods of volatility. These transactions tend to take place within industries as valuations and stock prices are likely to move in sync, thus lessening multiple disparities amongst parties. Stock swaps also facilitate substantial transactions without overleveraging balance sheets, and in some cases, result in lower pro forma combined leverage. The combination of increased scale and synergies can be a powerful motivator in otherwise challenging economic conditions for corporations.
Recent examples which underscore the logic of stock-for-stock transactions include two transactions unveiled in late January and early February. In January, Xylem agreed to acquire Evoqua in a $7.5 billion transaction to create a $7.0 billion pro forma revenue company specializing in water technology and treatment. In early February, Newmont Corp made an unsolicited $16.9 billion stock-for-stock offer for Newcrest Mining. While the offer was rejected as inadequate, Newcrest agreed to provide limited non-public information to Newmont potentially to facilitate an improved proposal. These two combinations demonstrate the conviction around industry scale and importance of balance sheet strength. We expect to see more stock-for-stock transactions, albeit dominated by friendly mergers, as the year progresses.