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Mergers & Acquisitions/Equities Market Update

Authors: Phillip Feng Co-VP Education/ Research, Edward Su Co-VP Education/ Research, Brent Huang Research Analyst, John Derraugh Research Analyst

All amounts in US$ unless otherwise stated.

Mergers & Acquisitions Update

In Q1 2019, a significant slowdown compared to Q1 2018 was observed with only 3,558 transactions worth a total of $801.5bn completed compared to 5,085 deals worth $943.5bn in the previous year. This slowdown is largely due to instability in global financial markets from multiple sources including Brexit and the U.S.-China trade war. Despite the sluggish start to 2019, there were some interesting deals announced such as in the pharmaceuticals sector and the industrials sector, Bristol-Myer Squibb acquired Celgene for $74bn and Onex acquired WestJet for roughly C$5bn, respectively. In addition to the M&A deals, companies such as Uber and Pinterest both launched their IPOs.


Shockwaves were sent throughout the airline industry on Monday, May 13 when it was announced that Onex Corporation (TSX:ONEX) was acquiring Canada’s second largest airline, WestJet Airlines Ltd. (TSX:WJA). The deal is valued at roughly C$5bn as Onex has agreed to pay $31.00 per share (~67% premium) to take over WestJet, including assumed debt. As a result of the deal, WestJet’s stock price rallied ~62% in after-hours trading before opening at $30.03. Most recently, WestJet closed at $30.19 as at Friday, May 31.

Onex is a private equity firm with assets under management of roughly $31bn. CEO and Founder of Onex Corporation, Gerry Schwartz, has had much interest in the aerospace industry, having failed to acquire Air Canada in 1999 and Australian airline Qantas in 2007.

The Calgary based airline, WestJet, serves 25 million customers annually resulting in F2018 revenue of $4,733mm and net earnings of $91mm. Despite EPS beats over the past 4 quarters, WestJet’s stock has struggled this past year due to headwinds from rising fuel costs and a 16-day pilot strike. WestJet has also failed to grow at the same pace as Canada’s largest airline, Air Canada, over the past 5 years. In that timeframe, Air Canada’s stock rose 289% in comparison to WestJet’s 14%.

Everything aside, the deal is viewed as a positive one for both WestJet and Onex. WestJet is partnering with an aviation focused fund containing a fair amount of expertise in the airline industry, while Onex acquires the airline it’s been searching for. Furthermore, the deal should be approved by shareholders with little resistance during their meeting of shareholders, which is expected to be held in July, considering the 67% premium paid by Onex.

Finally, the announced deal on Monday sparked additional M&A activity in the airline industry with reports releasing the following day that Air Canada was interested in acquiring Air Transat, Canada’s third largest airline.

Healthcare & Pharmaceuticals

On January 3, 2019, Bristol-Myers Squibb Company (NYSE:BMY) announced a $74bn acquisition of Celgene Corporation (NASDAQ:CELG). Bristol-Myers Squibb is an American pharmaceutical company headquartered in New York City. They manufacture prescription pharmaceuticals and biologics in several therapeutic areas including cancer and HIV/AIDS. Headquartered in Summit, New Jersey, Celgene Corporation is an American biotechnology company that discovers, develops, and commercializes medicines for cancer and inflammatory disorders.

The deal is the largest in history for the pharmaceutical industry and is expected to be completed by Q3 2019. Celgene shareholders will receive $50 in cash and one share of Bristol-Myers Squibb for each Celgene share they own. The deal was initially valued at $74bn when announced, although the value of the takeover is subject to changes to Bristol-Myers Squibb’s stock price.

In a statement by Celgene, 98% of Celgene shareholders who voted were in favour of the deal. However, in the months that have followed the announcement, there have been complaints from major shareholders of Bristol-Myers Squibb that Celgene’s future pipeline of drugs is limited with nothing to replace its current major revenue stream, Revlimid. As a result, Bristol-Myers Squibb’s shares have lagged behind gains made by the Health Care Select Sector SPDR Fund (XLV), a health-care industry ETF, which is up 2.2% in 2019 while Bristol-Myers Squibb is down 9.9%.

Despite concerns about Celgene’s pipeline of drugs, the deal is still positive for at least the next 5 years as it establishes Bristol-Myers Squibb as a cancer drug superpower and replenishes their own pipeline of drugs which has been limited for the coming years. Together, the companies will have nine mega drugs (generating more than $1bn in annual revenue each) and a pipeline of drugs in development that projects annual sales of $15bn, according to a statement from Bristol-Myers Squibb. It is worth watching whether new drugs are developed or acquired in other deals capable of replacing Revlimid’s nearly $10bn in annual sales as it approaches patent expiry in 5 years.

The acquisition announcement encouraged more M&A activity in the pharmaceuticals sector to compete with Bristol-Myers Squibb’s expanded pipeline. For example, leading biotech company Biogen announced that it will acquire Nightstar Therapeutics for $800mm while Swiss pharmaceutical powerhouse Roche announced that it will acquire Spark Therapeutics for $5bn.

Equities Market Update

Uber Goes Public

Uber Technologies Inc. (NYSE:UBER) is an American multinational corporation which offers ridesharing services for cars and bicycles, as well as food delivery services. Uber Technologies Inc.’s initial public offering was initially priced at $45.00 on May 9, 2019 and raised more than $8bn, placing it with an initial value of just over $75bn which is considerably short of the $100bn valuation expected by some analysts. The first trade when the stock opened on the NYSE on May 9 was at $42.00 before the stock closed 7.6% below the IPO price. Uber is currently trading at $40.41 as at May 31.

The results of this IPO, along with Lyft’s recent slide, demonstrate that the ride-sharing industry is in need of demonstrating they have a path towards profitability to succeed in the market. Both companies did not demonstrate a clear path to profitability which caused a lack of confidence from investors, resulting in their IPO flops.

Pinterest Goes Public

On May 18, 2019, Pinterest, Inc. (NYSE:PINS) had its IPO. Before being traded to the public, Pinterest was priced at $19.00 per share or $10bn in market cap. After opening, Pinterest quickly rose 25% to $23.75 per share or $12bn in market cap. Pinterest is classified as a social media website and mobile application. Users are able to make boards, where they can pin (upload, save, sort, and manage) images for other users to see. Currently, Pinterest has roughly 291 million active users, which is comparable to Twitter (330 million users), Reddit (330 million users), and Snapchat (287 million users). The rapid growth and popularity of Pinterest has resulted in the creation of virtual storefronts by businesses.

Recently, Pinterest released its first quarterly earnings report. Despite beating revenue estimates, Pinterest disappointed in other facets resulting in a 19% decline. Reasons for the decline included a net loss larger than expected (33 cents vs. 11 cents per share) and a weak outlook (revenue targets were reduced by $10mm). This is now the second major disappointment by recent tech IPOs following Lyft’s disappointing earnings report.

Upcoming IPOs

Within the next couple months, the market is expecting a handful of big name IPOs. These big names include Slack and Airbnb.

Slack is a cloud-based collaboration tool made for businesses. They provide efficient modes of communication for business project groups and is integrable with numerous 3rd party services such as Google Drive, Trello, and Dropbox. Some of its main customers include 21st Century Fox and Airbnb. Finally, Slack is pursuing a Direct Listing Process (DLP) versus an Initial Public Offering (IPO).

Airbnb is also planning to have their IPO in 2019. Airbnb is an online marketplace and a hospitality brokerage. Airbnb primarily competes with hotels and other websites listing properties for short- and long-term rentals. In 2018, Brian Chesky, CEO, announced that Airbnb would be ready for an IPO in the following year, but was uncertain if the company would follow through.

The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the authors, which do not necessarily correspond to the opinions of University of Waterloo Finance Association (“UWFA”). Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by UWFA. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.