|The year of the deal in Pa.? After a busy 2017, mergers and acquisitions unlikely to slow in 2018 |
Updated Dec 27; Posted Dec 22
This has been a year of mergers in central Pennsylvania.(PennLive file photos)
By Nick Malawskey
Across a spectrum of industries in Pennsylvania, 2017 was a year for big headline deals.
Companies took advantage of a surging economy to continue a trend of mergers and acquisitions that, experts say, is unlikely to slow in the year ahead.
And while each market segment -- retail, food, healthcare -- has its own internal trends driving M&A activity, those trends are buttressed by larger, broader market forces and a favorable regulatory environment that has companies looking to buy.
The list of business combinations and acquisitions making waves in Pennsylvania alone is dizzying: Ahold-Delhaize (which owns Giant), UPMC-Pinnacle, Rite-Aid-Walgreens, CVS-Aetna, Hershey-Amplify, Hershey Med and Highmark, Campbell's Soup and Snyder's-Lance.
Rebounding from the economic recession, over the last several years corporate profitability has soared. For example, the Derry Township-based Hershey Company's profit margins jumped from single to double digits post recession. That kind of growth has left some companies with strong cash reserves which, having weathered the financial storm, can be used to support mergers or acquisitions.
Those cash reserves are in turn supported by continued low-interest rates, which keeps borrowing costs low, said Daniel Eye, a senior portfolio manager at Roof Advisory Group in Harrisburg.
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"With borrowing costs so low, it's much easier to buy companies/businesses and have that purchase be accretive to your earnings and to be accretive in a fairly short period of time," Eye said. "Investors, shareholders and the stock market in general tend to look favorably on acquisitions that are expected to add to the acquiring company's bottom line quickly."
While those market and regulatory forces have provided a strong financial environment to support M&A activity, many of the announced deals -- whether in healthcare or retail -- have sounded similar themes when being discussed by corporate officials.
When Hollywood Casino owner Penn National announced it was acquiring fellow gaming company Pinnacle Entertainment, corporate executives highlighted, among other things, the cost savings the merger would bring. An eye to cost savings was also a driver in the merger of Ahold and Delhaize which completed this year, and resulted in a restructuring of Ahold USA in the wake of the merger.
In industries like food or retail, where revenue growth is often slow, merging with or acquiring a competitor is a way for companies to increase their bottom lines through consolidation and cost reductions either through headcount reductions or consolidations in areas like manufacturing or distribution efforts, said Eye with Roof Advisors.
In addition to cost savings, an acquisition is often a way to increase market share and geographic reach -- both key considerations of the previous mentioned Penn National-Pinnacle Entertainment and Ahold-Delhaize mergers.
Growth was also a key driver of the recently announced Hershey-Amplify deal. Long a chocolate-focused company, Hershey has dominated the domestic chocolate market for decades with little room to expand organically.
READ MORE: Penn National-Pinnacle Entertainment deal will create gaming giant
For years Hershey has been looking to expand its snack offerings -- in 2015 it acquired beef jerky maker Krave -- and the deal announced just this week brings to Hershey Amplify's SkinnyPop brand among others, expanding the company's portfolio of snack products.
Similar forces are at work regarding the similarly-timed announcement that Campbell's was making a move to gobble up Snyder-Lance, another salty-snack maker which owns the familiar Snyder's of Hanover brand.
"This acquisition will dramatically transform Campbell, shifting our center of gravity and further diversifying our portfolio into the faster-growing snacking category," said Campbell's CEO Denise Morrison in a statement announcing the purchase.
Whether it's a bolt-on acquisition looking for increased marketshare or product diversification, or a true merger to advantage of economies of scale, geographic reach and increased buying power, companies in the midstate and beyond appear to be embracing a bigger-is-better ethos.
In part this is due, said John Engle, president of Almington Capital, because while the economy has surged in recent year the growth in GDP, and general economic activity has been somewhat tepid.
"That sluggish growth has helped to drive incentives across a range of industries for companies to pursue consolidation over organic growth," he said. "For companies that benefit from economies of scale, especially, acquisitions have played a major part in growth strategies in recent years."
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Perhaps no industry's landscape has changed more than healthcare, at least in Pennsylvania, where major healthcare provider networks have been on massive consolidation campaigns for the last several years.
This year Harrisburg-based Pinnacle Health merged with Pittsburgh-based UPMC, the state's largest healthcare system. UPMC now owns almost two-dozen hospitals across western and central Pennsylvania, an incredible shift in what was a once a highly fragmented and community-based landscape.
That wave has been driven partially by cost-containment goals, but also by the better negotiating power offered by a larger system, particularly when negotiating contracts with insurers.
While consolidation and merger activity is likely to slow (at least regionally) in the healthcare provider market, the general pace of M&A activity isn't expected to slow in 2018. If anything, experts said, it's likely to increase -- driven in part to the nation's new tax plan.
Engle said he expects M&A activity to tick up as corporations repatriate overseas holdings thanks to the law's tax holiday, holdings which account to trillions of dollars.
READ MORE: Campbell Soup wants to acquire snack food company Snyder's-Lance for $4.87 billion
"A lot of that money is going to go toward corporate finance activities, including dividend increases and making new acquisitions," Engle said.
Those repatriated holdings, along with a lowering of corporate tax rates, will leave companies "flush with cash," said John Boyd, principal with the Boyd Company, who said he expects to see companies -- especially in the IT fields -- go on a buying spree over the next couple of years.
That, plus the federal government's "America First" policy could also drive business decisions as companies competing for federal contracts may have new incentives to shift operations back to the U.S., which could also spur M&A activity, he concluded.