24/7 Wall St.

In the world of mergers and acquisitions, it seems that large corporations are willing to wheel whether the economy and the stock market are strong or weak. The reality is that more mergers happen in good times than bad, in part because it’s hard for management to justify a sale of the company to shareholders if the value has dropped handily. Now that the bull market is over a decade old and the economic recovery is on rocky ground, some of the waves of mergers and acquisitions may have a lasting impact on how some of the top companies in corporate America are to be viewed.

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Some mergers are motivated by an ability to get more growth, but some mergers are defensive and viewed as the keys to future survival. Throughout 2018 and 2019, there have been a combination of rationales as the driving forces behind those mergers.

24/7 Wall St. has been tracking merger and acquisition (M&A) activity since its inception. The raw value of deals that have closed in 2018 and that are pending at this time in late 2019 makes the private equity acquisition bubble before the Great Recession look insignificant. If even a few more game-changing mergers are made in the next 12 to 18 months, it would be conceivable that $1 trillion worth of deals could have closed within just three or four years. For some scope and reference, note that the U.S. entire gross domestic product is now $21 trillion.

Many mergers have been announced or have closed, but just seven recent and pending deals have transformed how analysts and investors alike are having to view corporate America. Business models are becoming more complex, and some of these mergers may mitigate some of the changes that are desired by some politicians. Companies haven’t forgotten the rule that their businesses, or their entire business sectors, have to adapt and change as times change. Some of those changes have to occur in a very short period.

Some mergers seem hard to justify at first glance. After all, those “efficiencies” often come with layoffs, restructurings, forced moves on a workforce and other unpleasantries. Still, companies know that they need to defend their moats, and they better be ready for the next recession, whenever that actually arrives.

Here are seven recently closed and pending mergers that are changing the face of corporate America and that will likely force other competitors into more M&A activities ahead.

Big Pharma and Biotech

Bristol-Myers Squibb Co. (NYSE: BMY) is not the first member of Big Pharma to make a large acquisition in biotech, but the size of the acquisition of Celgene Corp. (NASDAQ: CELG) at somewhere close to $70 billion hadn’t really been seen in biotech since Roche bought Genentech for close to $50 billion a decade earlier. Celgene shares increased over 400% from 2010 through 2017, but its rise began to lose some steam as its revenue growth began to normalize.

Now the company has sold off the rights to Otezla for psoriasis in a rather impressive $13.4 billion sale to Amgen Inc. (NASDAQ: AMGN) that is among the largest biotech deals on its own. Amgen is currently the largest pure biotech by market cap, with a $125 billion value, and that’s larger than Bristol-Myers Squibb’s $78 billion value, before considering the Celgene deal.

Insurance and Health Care

CVS Health Corp. (NYSE: CVS) transformed itself into a powerhouse upon closing its acquisition of health insurance provider Aetna in a $69 billion merger in a deal that closed in late 2018. CVS has seen its shares pull back in 2019, in part on the fears of “Medicare for all” that some of the Democrats are pushing for in their 2020 campaigns. CVS had transformed itself a decade earlier with the acquisition of Caremark, a leading pharmacy benefits manager, in an all-stock acquisition that was valued at $21 billion when the deal was announced.

CVS now has a market cap of $77 billion, so the value of the “old core CVS drugstore” would be negative if you just used straight-line math. For proof this deal was changing corporate America, note that health insurer Cigna closed on a deal worth $67 billion or so when it acquired Express Scripts later in 2018, and UnitedHealth Group Inc. (NYSE: UNH) had advanced its model by acquiring OptumRX.

The Cloud and Big Tech

International Business Machines Corp. (NYSE: IBM) has been a behemoth that couldn’t find top-line growth to save its life. All of its strategic imperatives have grown, but IBM has been unable to change its reputation as a core IT services business with thousands of old, pasty IT guys wearing short-sleeved dress shirts with pocket protectors. The $34 billion acquisition of Red Hat furthers its move into more advanced technologies.

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IBM’s new initiatives for cloud offerings, machine learning and so on are expected to be augmented with the hypercloud from Red Hat going into IBM’s broader Hybrid Cloud division. Red Hat generated almost $3.4 billion in 2018 revenues, and analysts were projecting that to be $4.5 billion in revenue in 2020, with a $10 billion or greater potential by 2025. If IBM can allow the Red Hat team to amplify that growth through the IBM channel as the industry leader, then maybe 2020 can truly be the first year of revenue growth that matters to investors.

Tobacco: From Smoking to Vaping

Altria Group Inc. (NYSE: MO) and Philip Morris International Inc. (NYSE: PM) formally split their businesses apart in 2008. The companies announced in August of 2019 that they are now seeking to rejoin forces, as there is continued despair in the world of cigarette sales. It’s harder and harder to find actual smokers these days in America, but internationally they are still smoking, with higher rates in some parts of the world.

The companies are trying to morph their images of cigarette companies into vaping companies, and Altria already holds equity stakes in Anheuser-Busch InBev S.A./N.V. (NYSE: BUD), Cronos Group Inc. (NASDAQ: CRON) and the private vaping company Juul Labs. Meanwhile, Altria’s cigarette lawsuit liability is now virtually zero, other than its payments already committed to from the past, but Philip Morris International could face future suits from more than a handful of nations. Hence, these companies trying to change their customer-killing cigarette businesses to move increasingly into vaping.

Wall Street encourages a breakup to unlock value, then recombines to show the underlying value proposition. The move is not one that hasn’t been thought of before, and in 2017 British American Tobacco acquired the majority stake it did not already own in Reynolds American in a deal that included BAT shares and cash for a total of almost $50 billion.

The New Wireless Triumvirate

The persistent and ongoing merger in which Sprint Corp. (NYSE: S) would be acquired by T-Mobile US Inc. (NASDAQ: TMUS) has received some approvals, yet it faces an uncertain future over suits from attorneys general in multiple states. If this goes through, there will be just three major wireless carriers in America. In a price war, it turns out that industries tend to do better when there are only two competitors to deal with rather than three. A lot of stipulations have to go in their favor to get these wireless networks merged, but this will be a big change in the wireless landscape.

With AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) leading the wireless carriers, a combined Sprint/T-Mobile would create a more stable number-three carrier. It also comes with price assurances and development assurances for rural broadband access that can help America. Now it just remains to be seen if Comcast, Amazon, Dish Networks or someone else really wants to get aggressive in an effort to capture that number-four spot.

Wireless and Communications to Media Conglomerates?

If the Sprint/T-Mobile deal wasn’t enough to content with, AT&T has been far more aggressive than rival Verizon in changing how it wants to be viewed by investors. Verizon may have acquired AOL and Yahoo, but AT&T already had acquired DirecTV ahead of the news that it was spending $85 billion or so to acquire Time Warner. The deal took AT&T from a wireless carrier and a platform giant to a media powerhouse. Now AT&T owns HBO, Cinemax, CNN, Warner Brothers, D.C. and more brands in media that are easy to recognize.

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While this platform combination with media can offer more growth ahead, Wall Street has not rewarded AT&T’s shareholders all that much yet, and its shares are still only about three-fourths of their peak in 2016. AT&T has a $250 billion market cap now, along with close to a 6% dividend yield. AT&T’s balance sheet ballooned in assets to about $532 billion in 2018, up from $444 billion in 2017 and from $402 billion in 2015. Its long-term debt ballooned to $166 billion at the end of 2018 from $126 billion in 2017. In many ways, AT&T might be more like the combined Comcast and NBCUniversal than it is like Verizon at this stage of the game.

Walt Disney Really Is Pixar, Marvel, Star Wars, Disney, Fox, Hulu

Walt Disney Co. (NYSE: DIS) was already still fit as a stock to own for the decade, but after years of problems in its ESPN business and in a world where cord-cutters rule, Disney decided to acquire 21st Century Fox assets in a deal that closed in March of 2019. On top of the film and TV studios, it got channels and increased its Hulu stake ahead of the Disney+ launch later this year. The acquisition price was around $71 billion, all said and done, but Disney committed to selling more than 20 regional Fox sports networks in a deal close to $10 billion. This helped solidify Disney’s content and gave it a far wider media reach, but Disney’s long-term liabilities and debt shot up by almost $35 billion all-in after the inclusion on the balance sheet.

Now Disney has to race quickly to get the payoff for the deal to start. Still, adding all this in with Pixar, Star Wars, Marvel and so on is only going to make Hulu and the Disney+ service that much more attractive and should give it a strong jump against a rival service from Apple Inc. (NASDAQ: AAPL) and as Disney severs its media access with Netflix Inc. (NASDAQ: NFLX).

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These are obviously not the only large pending merger and divesting deals changing the face of corporate America. CBS and Viacom are rejoining forces, General Electric is divesting businesses from biotech to oil, Occidental Petroleum is acquiring Apache and Warren Buffett is sitting on a $100 trillion treasure trove to do a deal if he can find one that’s cheap enough. Moreover, the market is waiting to see if Apple ever will decide to make a transformative acquisition. Stay tuned.