Stocking up on an M&A currency

by Brenon Daly

Paper may be pricy these days, but it still has value as an M&A currency. So far this year, US public companies have been using their own shares at a near-record rate to pay for the tech deals they are doing.

451 Research‘s M&A KnowledgeBase shows that buyers have already announced transactions valued at more than $110bn this year that include at least some equity consideration. That puts full-year 2019 on track for the second-highest annual total since 2000. As paper has become more popular, it has figured into a broader spectrum of deals, most notably those transactions where the buyer is spending an unprecedented amount:

After doing only tiny tuck-ins, Shopify spent $450m earlier this week on robotics startup 6 River Systems. Shopify covered $180m, or 40%, of the cost with its own shares, which are up an astronomical 140% so far this year.

Splunk tripled the size of its largest-ever purchase with last month’s $1.1bn acquisition of SignalFx. Some $400m of the total consideration is coming as Splunk shares.

Salesforce used its own shares to cover the full price of its record $15bn pickup of Tableau Software in June. Our data indicates that in its next three largest acquisitions, Salesforce used all-cash structures in two of them, with only a minority portion of stock (20% of total consideration) in the third deal.

Taking hundreds of millions (or even billions) of dollars in payment in stock represents a pretty big gamble by targets and their backers this deep in the current decade-long bull market on Wall Street. Plenty of current signs – from an inverted yield curve to a slump in manufacturing output to an ongoing trade war between the two largest economies on the planet – point to a slowdown.

Already, companies are starting to feel the pinch. A just-published survey by 451 Researchs Voice of the Consumer: Macroeconomic Outlook showed that fewer than one in five respondents said their organization was ahead of its sales plan for Q2. That was the lowest level of outperformance in three years. If sales momentum does indeed stall and companies take down their numbers, stock prices will invariably follow suit. That could leave selling companies holding a bunch of shares that aren’t worth nearly as much as they once were.

Posted in M&A