December 30, 2016    7 minute read

2016: One Fine Year For Business. And A Tough One For Banks

Let It Rain With Money    December 30, 2016    7 minute read

2016: One Fine Year For Business. And A Tough One For Banks

The low or negative interest rates environment meant that money was cheap and appetite for mergers and takeovers high. The top ten mergers and acquisitions had a whopping cumulated value of some $380bn, making it one of the most successful post-crisis years in this field. At the same time, it has been a great year for “unicorns”, with the likes of Airbnb and Uber reaching valuations in the tens of billions and worldwide coverage.

The banking sector, on the other hand, has seen its most troubled year since 2008, with multiple fines (HSBC, JP Morgan and Credit Agricole for Euribor rigging and Deutsche Bank seeing the long shadow of the mortgage crisis in its massive $7.2bn settlement with the DOJ), top players failing stress tests (RBS), and the world’s oldest bank needing a bailout (Monte dei Paschi di Siena).

All in all, as they say in business: win some, lose some. See below the biggest winners and some of the top losers.
The_Top_M&A_Deals_Of_2016_Deal_Value_In_$bn_TMMChart

M&A Had A Great Year

  • AT&T And Time Warner ($85.4bn)

AT&T (NYSE: T) and Time Warner (NYSE: TWX) entered into a definitive agreement in October whereby AT&T will acquire Time Warner in a stock-and-cash transaction valued at $107.5 per share. On news of the announcement Time Warner shares closed at $89.48 per share giving the deal a 20% premium from their previous level of $80 per share. AT&T is the largest paying TV subscriber with large scale TV, mobile and broadband distribution and will, therefore, provide Time Warner with extensive and far-reaching customer relationships.

Conversely, AT&T will gain access to Time Warner’s vast library of content, with a premium that connects global audiences. During his campaign, Donald Trump declared that he would put a stop to this deal due to “too much concentration of power in the hands of a few” However, since his election victory, Trump has chosen advisors with a more relaxed attitude to antitrust issues. Trump’s transition team reportedly have an open mind on the progression of the deal, and it seems a reversal of his early rhetoric is likely.

  • Bayer And Monsanto ($66bn)

Bayer (BAY: ETR) and Monsanto (NYSE: MON) announced an agreement in September whereby Bayer will acquire Monsanto in an all-cash transaction for $138 per share. Based on Monsanto’s closing share price the day before the transaction proposal, the offer represents a 44% premium to that price. Monsanto will benefit from Bayer’s leadership in global innovation-driven Life Sciences with expertise in core segments such as crop production across critical geographies.

Bayer will be advantaged by Monsanto’s prominence in Seeds & Traits and Climate Corporation platform. As a consequence of this transaction, growers will see a broader set of solutions to meet their needs including digital agriculture and crop protection. The Earth’s population is ever increasing, and agriculture faces the challenge of feeding the extra three billion people who will populate the world by 2050. The Bayer and Monsanto deal should encourage mass food production on an even greater scale to help alleviate the problems and bring agriculture into the technology revolution.

  • Qualcomm And NXP Semi ($47bn)

Qualcomm (NASDAQ: QCOM) and NXP Semi (NASDAQ: NXPI) announced a definitive agreement whereby Qualcomm would acquire NXP and all its issued and outstanding common shares for $110 per share in cash. NXP will provide Qualcomm with its leadership in high-performance, mixed-signal semiconductor electronics. NXP prides itself on its innovative solutions and central position in the market for automotives, micro-controllers and network processing powers.

NXP covers a 25,000 customer base through its direct sales channel. NXP will enable Qualcomm to capitalise on its role in the mobile industry. The combination of the two companies will no doubt benefit the world which has been riddled by hacking scandals in 2016, as both companies are seeking to use their expertise to provide their customers with a safer and more secure global connection.

  • CenturyLink And Level 3 Communications ($34bn)

CenturyLink (NYSE: CTL) and Level 3 Communications (NYSE: LVLT) announced a unanimously approved merger in October under which CenturyLink will acquire Level 3 Communications in a cash and stock transaction. In a purchase price that implies $66.50 per Level 3 share, CenturyLink will own 51% of the company while Level 3 will own 49% comparatively.

Level 3 will gain access to CenturyLink’s large enterprise customer base while Level 3 will offer its global footprint in the 60 countries it operates in. The combination of the two companies will be able to expand their broadband reach to deliver robust fibre networks across the world which should enable cities to become ‘smarter’ in their everyday decisions in a business climate where sharing apps are becoming increasingly successful.

  • Shire And Baxalta ($32bn)

Shire (NASDAQ: SHPG) and Baxalta (NYSE: BXLT) reached an agreement where the two companies will merge. The value of the offer represents a premium of approximately 37.5% to Baxalta’s share price. Baxalta shareholders will gain a 34% ownership of the company. The two companies will be able to generate a renewed focus on leading biotechnology that fights rare diseases.

Together they will cover 100 countries developing treatments for orphan diseases. The combination of biotech companies should increase each other’s capacity to fight new diseases at their birth.

  • LinkedIn And Microsoft ($26.2bn)

Microsoft (NASDAQ: MSFT) and LinkedIn (NYSE: LNKD) have announced a deal in June in which Microsoft will acquire the professional networking company for $196 per share in an all-cash transaction. LinkedIn will maintain its individuality, brand, culture and independence in the transaction. LinkedIn is a strong and growing business, increasing its customer usage after launching a mobile app earlier this year.

LinkedIn acquired a small company itself, Lynda.com to establish a new learning platform on its site. LinkedIn know has over 433 million members worldwide. The two companies hope to empower every professional organisation on the planet together as social media becomes an increasingly important aspect of modern life it is an excellent move for Microsoft to have access to this market.

Banking Troubles

  • In the fall, Deutsche Bank was fined this year for its involvement in re-packaging mortgage-backed securities originating in the US housing market. The US Department of Justice concluded that the bank must pay $14bn for underwriting securities, but revised its earlier figure to $7.2bn in December.Deutsche_Bank_Share_Price_(YoY)_Adj_Close_TMMChart
  • Wells Fargo created millions of fake bank accounts in order to meet sales targets. The number of new applications to join the bank fell dramatically as consumers lost trust in the retail bank.Impact_Of_Wells_Fargo's_Scandal_On_Its_Business_Year-On-year_Declines_In_September__TMMChart
  • RBS failed its stress test in December which was not good news for the UK taxpayer who owns a majority stake in the British bank. Some of its business lines were transferred to its subsidiary Natwest.
  • Monte dei Paschi di Siena is Italy’s third largest bank and the most troubled in Europe. The ECB had given it until the end of the year to find €5bn in equity but on December 23rd it announced that it would need state help in order to survive. The bank has €27.8bn in non-performing loans.

Key Players Of The Year

  • Mark Zuckerburg: the owner of Facebook came under fire after reports that fake news shared on his site influenced the US elections.
  • Elon Musk: the owner of Space X, PayPal and Tesla Motors. Tesla has been involved in the race for driverless cars this year but experienced a setback after one of their test drives crashed.
  • John Stumpf: the CEO of Wells Fargo was removed from his position after it was reported that the San Francisco bank sales assistants had created millions of fake bank accounts to meet targets.
  • John Cryman: the CEO of Deutsche Bank; the institution faced a $14bn fine from the US Department of Justice which saw its share price collapse on fears that, despite restructuring, the bank would not be able to meet its payments. The fine has since been renegotiated to $7.2bn.

Potential Upcoming IPOs

These are the valuations of the companies, based on their previous fundraisers. They are not guaranteed to IPO this year.

  • Snap Inc: $25bn
  • Palantir: $20bn
  • Chobani: $5bn
  • Airbnb: $30bn
  • Spotify: $8bn
  • Buzzfeed: $1.5bn
  • Pinterest: $11bn
  • MapR: $1bn
  • Dropbox: $10bn
  • Uber: $69
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