Though not without its challenges, 2017 was a healthy year for liquidity in the venture capital ecosystem. The exit environment picked up steam after a slow 2016 and the pipeline of opportunities remained robust. The year showed active IPO and M&A markets as novel technologies continued to redefine traditional industries. Here are our top picks for some of the most significant and interesting M&A deals of 2017.
#1 United Technologies buys Rockwell Collins for $30B
In one of the largest deals ever in the aerospace industry, United Technologies announced last summer its plans to acquire airplane parts maker Rockwell Collins for $30 billion, including debt, establishing a new aerospace industry giant.
United Technologies is a deeply diverse business that includes the Otis escalator and elevator brands and Pratt & Whitney, which makes high-performance aircraft engines. According to the terms of the deal, United Technologies will pay $140 a share in cash and stock. Rockwell investors will receive $93.33 a share in cash and the remaining $46.67 in United Technologies stock.
Buying Rockwell, which produces electronics and avionics for aircraft, including the F-35 fighter jet, complements United Technologies’ offerings without any overlap. It also gives the firm more negotiating leverage over the airplane makers Boeing and Airbus.
United Technologies, which is based in Farmington, Connecticut, has long sought growth through acquisitions. In 2012, it acquired Goodrich for $18 billion. United also pursued a deal with Honeywell International last year, but ultimately abandoned the venture due to the likelihood that regulators would block the deal due to antitrust laws.
#2 Intel buys Mobileye for $15.3B
Intel made headlines in the tech world last March when it announced a deal to acquire driverless car chip maker Mobileye for $15.3B. On the surface, adding Mobileye seems to suit Intel's strategy. Mobileye already enjoys partnerships with 25 automakers to install its Advanced Driver Assist System (ADAS) into their vehicles. It also has experience working with Intel, and reports indicate that the cultural similarities of the two companies were an important factor that helped facilitate the deal. Intel and Mobileye are currently working with BMW to help the automaker develop fully autonomous vehicles with a goal of bringing them into wide-scale production by 2021.
On the other hand, among the deal’s possible flaws is the jaw-dropping valuation Intel assigned to the relatively small target. Mobileye generated GAAP net income of just $108.3 million on sales of $358.1 million in 2016. At the agreed-upon price, this means Intel valued Mobileye at either 42 times sales or 141 times earnings. The S&P 500 currently trades at about 26 times earnings, which itself is well above its historic average.
The acquisition appears to be a bold, all-in bet by Intel on the success of self-driving cars and Intel's future as a major component supplier to the market. Intel CEO Brian Krzanich is betting that autonomous vehicles will represent a potential $70 billion addressable market by the year 2030. In addition, Intel believes that self-driving cars will require a large amount of additional data center, network security, and cloud computing hardware, a potential $30 billion opportunity for the company supplying chips to power those systems.
#3 Amazon buys Whole Foods for $13.7B
In June, Amazon announced that it was buying organic grocery chain Whole Foods for $13.7 billion in cash. The deal shows Amazon's interest in moving into the business of operating traditional brick-and-mortar stores, even as many retailers that have been crippled by Amazon's growth have announced a series of store closings.
It also shows Amazon's growing interest in groceries. The company has its own delivery service, AmazonFresh, and is experimenting with a “click and collect” model, allowing consumers to buy groceries online, then pick them up in person.
Amazon said Whole Foods stores will continue operating under that name as a separate unit of the company. Whole Foods CEO John Mackey will stay on to lead Whole Foods, which will keep its headquarters in Austin, Texas.
Whole Foods, founded in 1978, is widely credited with helping to make organic food go mainstream. The company now has about 87,000 employees and more than 460 stores in the US, Canada and the UK.
#4 Gilead Sciences buys Kite Pharma for $11.9B
In late August, Gilead Sciences announced plans to buy Kite Pharma in a deal worth $11.9 billion. Santa Monica-based Kite Pharma is developing a CAR-T, or chimeric antigen receptor T-cell therapy, which harnesses the body’s own immune cells to recognize and attack malignant cells.
Gilead's growth has been fueled by its pricey, but revolutionary, hepatitis C drugs, but with fewer eligible patients and rising competition, sales have begun to fall.
Wall Street and Gilead shareholders have long been expecting Gilead to use its cash pile for a big-ticket acquisition.
“The acquisition of Kite establishes Gilead as a leader in cellular therapy and provides a foundation from which to drive continued innovation for people with advanced cancers,” said John F. Milligan, PhD, Gilead’s President and Chief Executive Officer.
Research and development, as well as the commercialization operations for Kite, will remain based in Santa Monica, California, with product manufacturing remaining in El Segundo, California.
#5 JAB Holdings buys Panera Bread for $7.5B
JAB Holdings, the owner of Krispy Kreme, Keurig and Peet’s Coffee, announced in April that it would buy US bakery chain Panera Bread Company in a deal worth $7.5 billion, expanding its already formidable coffee and breakfast empire.
The Luxembourg-based JAB, the investment vehicle of Germany's billionaire Reimann family, has snapped up several US-based breakfast and coffee companies in recent years, including Krispy Kreme Doughnuts and the K-cup coffee pod-maker Keurig Green Mountain Inc.
In 2015, JAB became the world's largest pure-play coffee maker by volume when it created Jacobs Douwe Egberts in Europe, a joint venture that combined its D.E. Master Blenders 1753 business with the coffee business of US-based Mondelez International Inc.
Panera has 2,000 bakery cafés throughout the US offering fresh ingredients that appeal to health-conscious consumers. The St. Louis-based company has reported better-than-expected earnings per share for the past six quarters.
According to a joint statement issued by JAB Holdings and Panera, the deal includes the assumption of about $340 million of net debt.
#6 PetSmart buys Chewy.com for $3.35B
In the biggest e-commerce acquisition in history, PetSmart agreed last year to purchase fast-growing pet food and product site Chewy.com for $3.35 billion. The deal is a huge one by any standard—bigger than Walmart's $3.3 billion deal for Jet.com last year—and especially for a retail company like PetSmart, which was itself valued at only $8.7 billion when private equity investors took it over in 2015.
Chewy.com has been one of the fastest-growing e-commerce sites on the planet with nearly $900 million in revenue last year, in what was only its fifth year in operation. The company had been a potential IPO candidate for this year or next but was taken out by its brick-and-mortar competitor before that.
Chewy was founded in 2011 by Ryan Cohen and Michael Day and built a cult following for its excellent customer service, large selection and fast shipping. The deal seems like the type of bet-the-company acquisition by a traditional retailer that commerce-focused venture capitalists have been betting on for some time. While Walmart’s acquisition of Jet.com was a huge deal by e-commerce standards, it represented just a fraction of Walmart’s market value. Silicon Valley investors are surely hoping more will follow in PetSmart’s path, as brick-and-mortar retailers struggle to adapt to the impact of changing consumer behaviors.
M&A Outlook for 2018
Although the US presidential election and the UK leaving the European Union last year caused some uncertainty among dealmakers about the global economic outlook, that uncertainty seemed to wane throughout the year. As 2018 begins, the stage is set for solid economic performance resulting in a possible record year for M&A transactions. The S&P 500 has gained $2 trillion in value, up 16.3 percent since the election. The unemployment rate stands at 4.1 percent—a 17-year low. With less regulation, expanding trade deals, low interest rates, low inflation, consistent corporate earnings increases, a rising GDP and now tax reform becoming a reality, dealmaking in the US is set to rebound very strongly in 2018 over 2017. According to some experts, dealmaking could reach over $1.6 trillion in 2018—up $200 billion from 2017.
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