Cracks appear in US$890b stock-fuelled M&A boom

[NEW YORK] The slump in the stock market is having ripple effects in mergers and acquisitions.

Zoom Video Communications' deal to use its stock to acquire Five9 collapsed on Thursday after a plunge in the buyer's share price. The agreement, which valued Five9 at more than US$14 billion when it was announced, is now worth only US$9.5 billion.

Now investors will be watching the stock prices of other buyers to see if more deals are at risk, especially in technology, where some high-flying shares have been hit especially hard.

Companies globally have announced nearly US$890 billion of acquisitions this year involving some form of stock payment, with US$547 billion of those deals still pending, according to data compiled by Bloomberg.

Soaring valuations since stock prices bottomed in 2020 have allowed market darlings to use their shares as a cheap currency to grow through acquisitions, without burdening their balance sheets. While that was a boon when the market was surging, the risk is it comes back to bite them when a correction comes.

Fantasy-sports giant DraftKings is in the middle of two cash-and-stock deals, while its shares have declined 24 per cent in the past three weeks. One is a US$22.4 billion offer for Entainc and the other is an agreement to buy Golden Nugget Online Gaming for US$1.56 billion. Another such example is US cybersecurity company NortonLifeLock's deal to buy Avast for US$8.6 billion in cash and shares.

The biggest pending stock deal in the US is in the financial-data business: S&P Global's US$43.5 billion purchase of IHS Markit.

Zoom's offer valued for Five9 at about US$200 a share when the deal was announced in July. Zoom's stock has slumped 28 per cent since then, cutting the value to less than US$145 - below where Five9 was trading in July. Analysts say it makes sense that Five9 holders spurned the transaction.

BLOOMBERG