Robust Sectors in Healthcare and Metals & Mining

Mergers and acquisitions have been declining this year, however, the healthcare and metals and mining sectors have remained robust. According to the London Stock Exchange Group’s data, total deal value worldwide is about $1.22 trillion year-to-date. This reflects a 39% drop compared to just over $2 trillion in the first half of last year. The deal count has decreased and deal sizes have become smaller, resulting in fewer handshakes.

One main reason for the decline in M&A deals is higher interest rates. Central banks have raised interest rates to reduce economic demand and bring inflation under control. As a result, profits are lower this year, making it less appealing for buyers to finance deals at higher costs and lower potential returns.

Private equity has been hit particularly hard, with deal value plummeting by 51% to just over $251 billion. Private-equity firms had amassed nearly $2 trillion in cash but have been hesitant to buy in recent times.

Royce Investment Partners portfolio manager, Miles Lewis, predicts that deals will slowly pick up once interest rates stabilize, the Federal Reserve pauses its interest rate increases, and markets anticipate a recovery in profits. In the meantime, the healthcare and metals and mining sectors continue to thrive despite the overall drop in M&A activity.

Healthcare Companies Show Resilience Amid Economic Turmoil

According to recent reports, the healthcare industry continues to hold up in today’s volatile economic climate. While the number of healthcare deals has dropped slightly, the total value of deals made in 2020 hit a staggering $175.5 billion—a 40% increase from the previous year.

A significant contributing factor to this number was Pfizer’s acquisition of Seagen for $42 billion. Despite the majority of the deal being financed with debt, this acquisition accounted for a large portion of the year’s healthcare deal value. Even without this acquisition, however, the healthcare industry’s increased deal value is impressive, particularly given the current market environment.

Large pharmaceutical companies are on the lookout for new products to improve their earnings growth. They can make these purchases more easily as the smaller biotech companies that supply these products have seen their market values plummet due to the bear market. Unlike other industries, healthcare is not tied to economic demand, meaning that it remains a reliable investment even in times of recession.

Recently, Eli Lilly announced a $2.4 billion agreement to acquire Dice Therapeutics in order to boost their presence in immunology. The acquisition appears to be financially feasible, as Lilly currently has just under $4 billion in cash reserve and is expected to generate over $14 billion in Ebitda by 2024. This acquisition was made at a substantial premium, sending Dice stock up about 38% from its pre-deal price.

Overall, the healthcare industry has shown remarkable resilience amidst today’s economic turmoil. With pharmaceutical companies eager to expand their portfolios, we can likely expect continued growth and investment in this sector.

Metals and Mining Deals Rise to $95.6 Billion

Despite the global pandemic, metals and mining deals for this year have increased to $95.6 billion, which is up 202% year over year. The expansion of miners in a stable environment has aided the improvement in cash flows, and commodity prices have held up well. The price of gold, for example, has increased by approximately 5% from its price last year and is just below $2. It has now surged almost 20% from its recent low in October.

The Acquisition of Newcrest by Newmont

Newmont (NEM) has agreed to purchase Newcrest for roughly $19 billion. Although Newmont has $3.5 billion in cash, it has decided to fund part of the deal by giving Newcrest shareholders stock. According to FactSet, Newmont’s total debt is currently below $3 billion, compared to analyst forecasts of $6.2 billion in EBITDA in 2024.

Interestingly, Newmont shareholders do not seem concerned by the deal as their stock is down only 7% since the announcement was made in May when gold decreased by 4%. This suggests that the acquisition did not drastically reduce stock value.

The Bright Side of Deal-Making

The current economic circumstances may not be ideal for deal-making; however, it is important to remain optimistic as we can see that deals are indeed occurring. In some areas, deal-making is still witnessing growth. Where there is a temporary lull, there is always the possibility of a resurgence.

Don’t let up on deals, they can always come back.

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