Mergers Are Down, but These 2 Sectors Are Booming

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Handshakes for mergers and acquisitions are happening far less frequently this year, but activity is robust in healthcare and the metals and mining sectors. 

Total deal value worldwide is about $1.22 trillion year to date, according to data from
London Stock Exchange Group.
That is down about 39% year over year from just over $2 trillion for the first half of last year. Deal count is down and deal sizes are also smaller.

One of the reasons is higher interest rates, as central banks have lifted rates to cool inflation by reducing economic demand. That means profits are faltering this year, and with a higher cost for a buyer to finance a deal, the potential return from an acquisition has become far less appealing, forcing buyers to hibernate. 

Private equity, specifically, is down a lot. Deal value there is down about 51% to just over $251 billion. Private-equity firms had built up almost $2 trillion in cash and have been hesitant to buy of late.

Deals will slowly come back on as rates stabilize, the Federal Reserve hits the pause button on further increases, and markets eye a recovery in profits, said Miles Lewis, portfolio manager at Royce Investment Partners, an asset manager that happens to own stock in companies that generally look to make acquisitions. 

In the meantime, a couple sectors have been hot despite the overall downturn in mergers. 

Healthcare deal value this year hit $175.5 billion, up 40% year over year. To be sure, that is because of
(ticker: PFE) $42 billion agreement to acquire of
(SGEN), the majority of which
must finance with debt. The number of healthcare deals have dropped a touch. Still, without Pfizer’s purchase, healthcare deal value would still be up a few billion dollars, certainly something to write home about in this market.

Larger drugmakers are looking for new products to bolster sales and earnings growth—and they can buy those assets because the market values of smaller biotech companies have gotten hit as a result of the bear market. Healthcare buyers don’t have to worry about the economy, since drug demand isn’t influenced by economic demand. 

Eli Lilly
(LLY) announced it had agreed to buy
Dice Therapeutics
(DICE) for $2.4 billion.
Eli Lilly
is boosting its presence in immunology and the deal seems financially feasible. Lilly has just under $4 billion in cash. It does have over $18 billion in total debt, though most of that is due many years from now and analysts expect the company to generate over $14 billion in earnings before interest, taxes, depreciation, and amortization, or Ebitda, in 2024, according to FactSet. Lilly was able to buy Dice at a substantial premium, sending Dice stock up about 38% from its pre-deal price. Lilly’s stock is up about 1% from just before the deal was announced by Lilly, which has $430 billion by market value. 

In metals and mining, deal values for the year recently hit $95.6 billion, up 202% year over year. Part of the picture is that miners are expanding in an environment that has seen commodity prices hold up well. The price of gold, for instance, is up about 5% from this time last year, at just under $2. It is up almost 20% from its recent low in October. The resulting improvement in cash flows can help buyers finance deals. 

(NEM) has agreed to acquire
for about $19 billion.
has about $3.5 billion in cash, but it is partly financing the deal by issuing stock to Newcrest shareholders. Newmont’s total debt is less than $3 billion, versus analyst forecasts for Ebitda of $6.2 billion in 2024, according to FactSet.

Newmont shareholders don’t seem concerned by the deal, as the stock is down about 7% since the trading day before the deal was announced in May, with gold down about 4%. That is a normal move for a miner when the price of the commodity drops, implying not much of a discount to the stock, given the acquisition. 

Don’t give up on deals. They are happening in some areas, and where they aren’t, they will come back. 

Write to Jacob Sonenshine at [email protected]

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