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M&A Activity in 2021 Could Boost Certain Sectors
Companies will be looking to mergers and acquisitions to drive their business growth this year, with certain sectors such as banks and health care in the hot seat.
Throughout the latter half of 2020, when it looked like Democrats could enjoy comfortable majorities in both the House and Senate and win the White House, the conventional wisdom was that taxes would likely go up, perhaps considerably, for the wealthy. That prospect is partly why Morgan Stanley (ticker: MS) bought Eaton Vance in October.
Shelling out $7 billion, Morgan Stanley gained access to the firm’s exchange funds, a complex set of vehicles that allow investors to swap their concentrated stock positions for more diversified holdings, which reduces both their exposure to risk and tax burden.
JPMorgan Chase & Co. (JPM) CEO Jamie Dimon reportedly had his eye on Eaton Vance as well. With that deal off the table, he’ll likely turn his attention to other opportunities, even if the tax code remains unchanged. He won’t be alone.
The reason is that after an extended period of low interest rates and tightening margins, big banks are increasingly craving the steady and reliable revenues generated by wealth management services. It’s the reason behind Silicon Valley Bank’s (SIVB) recent purchase of Boston Private.
In a testament to how the market values such services, the deal angered some Boston Private investors who felt the price tag of $900 million was “grossly too low.”
For investors, piggybacking this trend could be a no-brainer. On the one hand, it may be possible to profit off some upside that typically occurs when a company gets acquired. Even if some banks don’t benefit from a merger and acquisition bump directly, financials have suddenly become attractive on their own.
After being market laggards for several years, these firms have been buoyed in recent weeks by the resumption of buybacks, a steepening yield curve and the likely prospect of additional stimulus in the wake of Democrats winning greater control of the Senate. Beyond that, many of them pay a handsome dividend.
Acquirers, which beyond JPMorgan could include a handful of “super regional” banks similar to Silicon Valley Bank, mull targets in the weeks and months to come.
Potential M&A Targets
Federated Hermes (FHI), the Pittsburgh-based asset manager and provider of mutual funds and annuities, is the most probable acquisition target. Along with having several attractive features such as strong organic growth, a 3.6% dividend and a sophisticated environmental, social and corporate governance (ESG) offering, its roughly $2.9 billion market cap makes it easily digestible for many banks. But it lacks an exchange-traded fund business, mainly because the firm has done well with other, higher products that have higher fees, such as mutual funds. The company plans to address that gap this year. It’s worth noting that the founding family still controls the company, which could be a complicating factor for any would-be acquirer.
British-based Janus Henderson Investors (JHG), which has a traditional set of mutual fund products, is another firm that could get gobbled up. The company has a high-quality active management business, and in addition to providing a 4.4% dividend yield, Janus has a robust retail distribution business in the U.S. and Japan. But while FHI’s stock price is down about 21% for the year, Janus’ is up by about 19% during the same period, giving it a much steeper valuation, with a current market cap of about $5.6 billion, at the time of this writing.
Invesco (IVZ) could be another worthwhile target. It pays a solid 2.8% dividend yield and touts a strong ETF franchise. Invesco Private Capital invests in private equity funds, and Invesco Real Estate is a significant investor in the property space. Although its 2019 purchase of OppenheimerFunds weighed on the company that year, its most recent earnings report showed quarterly improvements in operating margin and earnings per share.
Moving Pieces
Meanwhile, M&A this year will hardly be limited to banks. We are likely to see a slew of activity in the health care and biotech sectors. In December, AstraZeneca (AZN) got a head start, announcing its acquisition of Alexion (ALXN).
Pfizer (PFE), for instance, faces a steep patent cliff, with more than a quarter of its sales tied to drugs whose patents will expire within the next five years. That means the company will be under pressure to make a move to energize its business. While Biogen (BIIB), Merck (MRK) and Amgen (AMGN) don’t face as acute patent issues, each lacks a high-profile growth engine. So those firms could also be active.
To reduce risk, buyers in this space typically target companies on the brink of producing promising phase three data for headline drugs. Based on that, possibilities include BioMarin (BMRN), which could soon win approval for a landmark gene therapy for hemophilia.
Amicus (FOLD) and Intra-Cellular Therapies (ITCI) are also options. The former recently won a special designation for a therapy to treat late-stage Pompe disease patients, while the latter could be close to getting approval for drugs to treat bipolar disorder.
Though M&A activity was muted during the first part of 2020, it picked up considerably as the year wore on, especially during the fourth quarter. With rates low and firms eager to add growth drivers to their business, expect that trend to filter into 2021, which could give investors in financials, health care and biotech the chance to benefit.
