At the beginning of 2014, investment banks were getting excited at a large pipeline of IPOs, particularly in the tech and media verticals, that were ready to hit the market. With Goldman Sachs successfully giving the markets Twitter (TWTR) at a price that seemed to defy gravity in 2013, and with rumors of many online media companies like Gilt Group, Vice Media, and Airbnb slated to release stock on the public markets, the darling story of Twitter was expected to repeat itself many times over.
Then in the first quarter of 2014, IPOs were delayed or halted, and the issuance of new stocks has taken a back seat to the larger and more slowly emerging trend of M&A activity in a totally different sector: pharma. The biggest of these many stories is a rumor that has been percolating for over a month: American drug maker Pfizer (PFE) is looking to purchase AstraZeneca (AZN) for over $100 billion in cash and stock, and a hostile takeover may be in the cards if AZN’s board refuses the offer. Meanwhile, Pfizer CEO has presented his plans for the merger before Britain’s Parliament, assuring legislators that their intention is not to gut the company while also refusing to get locked into any promises of avoiding job cuts for UK and European operations.
All of this is sketchy and controversial for British politicians and the general public, but the move is a major sign of a larger trend: M&As, not IPOs, may be the major stories of 2014.
How does this matter to analysts? There are three important points to consider:
- A careful understanding of why pharma mergers are becoming so trendy (hint: it’s taxes) can help you tweak your models for stocks in both Europe and the U.S., yielding new price targets and trading opportunities.
- Greater M&A activity in one industry and disappointing IPO activity in another industry can be an indicator that one sector is losing interest and favor amongst investors.
- If the motivation behind the current pharma mergers applies to other companies, more M&As are likely to come, which may make target acquisitions that are publicly traded underpriced relative to the price larger companies are willing to pay for them. Again, more trading opportunities.
This is partly an issue of tax law, partly an issue of accounting, and partly an issue of sector valuation. These three topics can be readily mastered by an investor with a good knowledge of GAAP, financial valuation, and international tax legislation. Of course these are massive and complicated topics, but a mastery of them can also lead to massive profits for the aggressive trader.