Deal-Hungry Companies Tap Surging Stock Prices to Fuel M&A

(Bloomberg) -- As deal activity falls across the world, a select group of acquisitive companies is still finding a way to get transactions done by taking advantage of surging stock prices.

European companies have paid with their own shares for a series of high-profile transactions in 2020, including a bid by Just Eat Takeaway.com NV to enter the U.S. and create one of the world’s largest meal delivery companies. The volume of acquisitions by European buyers involving at least partial stock payment has jumped 83% through Tuesday to $37 billion, according to data compiled by Bloomberg.

That’s helped keep deals flowing at a time when overall M&A in the region has fallen to the lowest level in a decade. The two largest takeovers of U.S. companies this year were also all-stock transactions. The payment method has proven an attractive option for companies reluctant to take on more debt at a time of economic uncertainty.

“Some of the large technology or health care companies are looking at their rich stock valuations and using that as a currency to pursue growth,” Alison Harding-Jones, head of mergers and acquisitions for Europe, the Middle East and Africa at Citigroup Inc., said in an interview. “I would expect to see more of those deals.”

Just Eat Takeaway shares have gained 14% in Amsterdam trading this year, bucking the 13% decline in the benchmark STOXX Europe 600 Index over the same period. The rise has given Just Eat Takeaway a market value of about $15.7 billion and brought it more financial power to outbid Uber Technologies Inc. with its $7.3 billion offer for Grubhub Inc. in the U.S.

Valuation Bridge

Other companies are seeing stock-for-stock acquisitions as a way of conserving cash and getting around the lack of bank financing.

“There is still some uncertainty in the market,” Pier Luigi Colizzi, head of EMEA M&A at Barclays Plc, said in an interview. “Corporates tend to be shy to re-leverage after a crisis, so they’ll favor stock deals in the short term.”

So far in 2020, deals with a stock payment element account for 12% of the value of all transactions announced by a European acquirer, compared with 5.5% during the same period last year, Bloomberg-compiled data show.

Notable examples include French payment processor Worldline SA’s proposed $8.6 billion purchase of rival Ingenico Group SA, which offered the target’s investors a mix of cash and shares. Intesa Sanpaolo SpA offered all stock in its unsolicited bid for smaller Italian lender Unione di Banche Italiane SpA, a deal valued at about $5 billion when it was announced in February.

“Stock deals work well to bridge valuation gaps in a volatile environment and also allow companies to protect their balance sheets,” said Robin Rousseau, head of EMEA M&A at Deutsche Bank AG.

The trend of all-stock deals has also started to spread. National Commercial Bank, the largest Saudi lender by assets, last week proposed to pay as much as $15.6 billion in stock to acquire rival Samba Financial Group in what could become the world’s biggest banking takeover this year.

While such deals aren’t on the rise in the U.S., the payment method helped this year’s biggest transactions get done. Aon Plc is paying in shares for its planned $30 billion purchase of rival insurance brokerage Willis Towers Watson Plc, which ranks as the largest U.S. takeover of 2020. Morgan Stanley’s proposed $13 billion acquisition of E*Trade Financial Corp. is also being funded with stock.

“In uncertain times, stock deals can allow targets to participate in the upside of a combination -- including synergies -- while helping to bridge potential valuation gaps and manage debt levels,” said Dwayne Lysaght, co-head of EMEA M&A at JPMorgan Chase & Co. “As a result, they may also require less of a premium.”

The Covid-19 lockdowns have pushed companies across sectors like travel and retail to the brink, with many turning to state aid or embarking on heavy cost-cutting programs. Prolonged business disruptions will force many mid-sized companies to seek strategic measures to survive, according to Citigroup’s Harding-Jones.

A lot of companies valued at $1 billion to $5 billion are realizing they need to build scale, which should drive stock-for-stock deals in the coming months, she said.

“It’s been a revelation that execution of M&A has continued, albeit at a slower pace,” Harding-Jones said. “What this crisis has taught us is that you can always find ways to get deals done.”

©2020 Bloomberg L.P.