Marriage in times of crisis, a risky bet for companies

In Beijing, September 14, 2020.

Before weddings, there is the breakdown of engagement: that between the jeweler Tiffany and the luxury empire LVMH or the abortive sale of Victoria’s Secrets. The Covid-19 pandemic, which has paralyzed the global economy, began by bringing down many business takeovers initiated before the crisis, even if the trend is towards recovery. In recent weeks, business has picked up again, with the partial acquisition of Chinese TikTok by Oracle and Walmart, the takeover by Nvidia, manufacturer of semiconductors for video games, of the British Arm or the sale of biotech Momenta to Johnson & Johnson.

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As Goldman Sachs bank explained, previous recessions (in the early 1990s, when the dot-com bubble burst, in 2000, then the 2008 financial crisis) led to a halving of the number mergers and acquisitions. This is largely the case this year: the total value of reconciliations reached 1,800 billion dollars (1,540 billion euros), in the world, during the first eight months of the year, a decline of 31% by compared to 2019. Mergers are generally carried out in three waves: the first targets “lame ducks”, sold because they cannot survive; the second, sectoral consolidations, to generate synergies; the third concerns external growth operations in new and international sectors.

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The first phase was partially hampered by the US central bank, the Federal Reserve (Fed), which funded companies to their thirst, artificially shielding them from bankruptcy. Spring’s cash rush allowed Carnival cruises to raise capital to survive, while airlines benefited from government support. These “zombie companies” are dead, but nothing happens as long as they have cash. No merger has yet taken place in the US airline industry, apart from a commercial agreement between American Airlines and JetBlue. Only the oil sector, already moribund and over-indebted before the crisis, has seen the start of consolidation: the giant Chevron has bought the hydrocarbon producer Noble Energy, while Marathon Oil has sold its gas stations to the Japanese owner of the chain. 7-Eleven.

A race towards the world of tomorrow

The second wave of acquisitions concerns areas with which executives are familiar. Covid-19 requires, these are agreements where the management had already initiated talks or already knew each other – difficult to make ultra-confidential advances by teleconference. We can see it in two major sectors that are enjoying success: digital and pharmaceuticals. Microsoft, failing to get its hands on TikTok, is spending $ 8.5 billion on ZeniMax Media video games, while Teladoc has merged with Livongo to form the world’s number one medical consultation by video.

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