Mergers & Acquisitions

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>>> These 5 companies could disappear in 2018’s wave of M&A


By Jeff Reeves

Dec 6, 2017



https://www.marketwatch.com/story/these-5-companies-could-disappear-in-2018s-wave-of-ma-2017-12-06



Weibo, Apache, Molson Coors, AMD and BioMarin


It’s time to make a shopping list — and not just for Santa.

The fourth quarter is also a good time for both corporate America and investors to prepare for even more buyouts in the new year.

Some companies are finishing up an impressive 2017, with plenty of cash to deploy on a shiny new toy and the wind at their backs after a roughly 18% rise for the S&P 500 index SPX, -0.01% Others are closing the books on a lackluster year, and looking for a way to grow via acquisition to prevent similar troubles in the months ahead.

And occasionally you find a spendthrift CEO who can’t say no to the shopping bug. Just look at the $69 billion proposal for CVS Health Corp CVS, +0.52% to purchase Aetna AET, +0.12% a deal that has many investors skeptical.

Whatever the motivation, buyouts are sure to come hot and heavy in 2018. The Federal Reserve is looking to continue its tightening of monetary policy, which will increase borrowing costs to finance big-ticket deals, and that means there’s an incentive to ink transactions sooner rather than later. Furthermore, many companies that have seen big appreciation over the last 12 months have more bargaining power for stock-based deals.

And of course, there’s the never-ending quest to be bigger and better — and after a rosy 2017, some CEOs may realize they are under the gun to deliver again in the new year.

Some acquisitions plans come out of left field, but here are a few potential transactions I’m watching that could take place in the next 12 months. And if they happen, they could result in a nice pop for the company that is being bought out.

Weibo

Weibo Corp. WB, +0.04% is one of China’s most popular social-networking sites, and has captivated investors with roughly 450% gains since December 2015. Part of the reason is the big growth potential, with Weibo tracking 22% revenue growth and 83% EPS growth this year. Its user base eclipsed rival Twitter Inc. TWTR, -0.05% this year, and Weibo is still growing audience as Twitter flatlines.

But an equally big reason for the run-up in the stock price is rumors of an acquisition, most likely by Chinese e-commerce giant Alibaba Holdings BABA, +0.21% A deeper look at Weibo, a $22.3 billion company, reveals that only roughly 12% of its stock is publicly traded; Alibaba owns about 30% and just over half of the company is in the hands of parent Sina Corp. SINA, +0.00%

Alibaba, with a market cap of more than $430 billion, is an ambitious Asian tech company that has both the will and the capital to make big-ticket deals like this, and its close relationship with Beijing means it won’t suffer bureaucratic hangups like a Western company would.

Apache

With energy prices still soft, most companies in this sector have to rely on scale and efficiency to deliver shareholder value. And natural-gas company Apache Corp. APA, +0.20% is an attractive option for larger integrated energy companies looking to grow via acquisition.

For starters, the company is well capitalized, with $1.8 billion in cash and a $16 billion market capitalization over about $8.4 billion in total debt. That’s pretty lean compared with other midsize energy companies, so a buyer wouldn’t be saddled with huge liabilities. Furthermore, Apache has already made many of the hard decisions like unloading noncore assets, such as a 2013 deal to sell $3.75 billion in Gulf operations.

We’ve already seen glimmers of interest as Apache has improved its operations. In late 2015, it rejected an all-stock offer from Anadarko Petroleum APC, -2.38% Other suitors have been rumored in the intervening years, including Occidental Petroleum OXY, -1.04% Investors can expect more such offers in the months ahead.

Molson Coors

The merger of Molson Coors TAP, +0.93% with SABMiller in 2016 created the world’s third-largest beer brewer. It also create a one-stop shop for stodgy domestic beers that nobody likes in the age of mixed drinks and microbrews.

It’s no wonder, then, that the stock has been steadily dripping downward since the deal closed and has suffered a nearly 20% decline so far in 2017. Cheap watery beers aren’t a growth industry anymore — and no, Blue Moon doesn’t count as a premium offering, my friends.

So what’s the endgame for Molson Coors? Diageo PLC DEO, +1.81% DGE, +1.36% could pursue the brand; it already has Guinness stout and still has room for a few other brews in its portfolio to compliment an array of spirits like Tanqueray gin and Johnnie Walker whiskey. Or heck, megabrewer Anheuser Busch InBev BUD, +0.03% is already roughly 10 times the size, so why not just buy up this competitor and shutter the weakest brands to consolidate the market?

One way or another, Molson Coors is going away. The stock doesn’t have a bright future, and management will be eager to forge a deal with any suitors in 2018 to prevent further erosion of shareholder value.

AMD

Advanced Micro Devices Inc. AMD, +0.10% simply cannot survive on its own in this era of semiconductor consolidation.

There are countless headlines over the past few years showing how the chips space is simply getting smaller. Take Qualcomm QCOM, +0.14% which is looking to close its $47 billion bid for NXP Semiconductors NXPI, +0.51% in what will be the largest acquisition in Qualcomm’s history. Or better yet, take Broadcom AVGO, +3.36% and its staggering $105 billion bid for Qualcomm in a hostile takeover before the NXP deal was even finalized.

There no shortage of growth potential for the sector, from bitcoin mining to videogaming to AI to the Internet of Things. But it’s increasingly difficult for semiconductor companies with one focus to survive amid the consolidation.

The good news is that AMD has some attractive parts, including its videogaming and graphics engines, so it simply won’t fade away. That’s evidenced by a recent partnership with Intel INTC, +0.07% to create a laptop chip to compete with Nvidia NVDA, +0.18% — the first pairing between the companies since the 1980s.

AMD saw a since run-up in 2016 as the buyout frenzy began in the space, but shares have started to come back to earth. That may mean that less of a premium is needed for a potential acquirer — and increases the likelihood of a deal in 2018.

BioMarin

Acquisitions of smaller biotech stocks are fairly common, but incredibly difficult to predict. Still, I’ll try my hand at it with BioMarin Pharmaceutical BMRN, +0.07% as my pick for the likeliest target to see a buyout in the new year.

The reason is that BioMarin is hyperfocused on rare-disease drugs. This includes treatments for Batten disease, a fatal neurological condition in children, and phenylketonuria or PKU. There are literally no other options for many patients suffering from these conditions, which means BioMarin serves an important market and is largely free from competitive forces.

While revenue growth is pretty impressive, running at a 17% clip this year and another 14% or so predicted in 2018, BioMarin is still unprofitable. As a result, the stock has remained largely rangebound between $80 and $100 since the beginning of 2016.

However, a strong product pipeline and an existing portfolio of proven drugs makes it worthy of consideration as a buyout candidate. At $14 billion, it is hardly the cheapest biotech out there, but Big Pharma execs know they will get something substantive in this firm.

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