Merger and Acquisition (M & A) is a familiar and unfamiliar word, because it takes place almost every day in the ever-changing shopping malls, and some malicious mergers and acquisitions are vividly called "barbarians at the door", such as the well-known "Battle of Treasures".

For veteran investors, companies that used M & A news to hype their share prices before the 2015 crash also abound-and have not yet been eradicated. Unfamiliar is because M & A deals involve hundreds of millions or even tens of billions of dollars, which is too far away from ordinary people.

Capital Group, a global fund giant, recently released a report that a new wave of mergers and acquisitions is coming after the epidemic. On the one hand, due to factors such as low interest rates, many companies have excess cash and rising stock prices. Both are conducive to completing mergers and acquisitions at a lower cost of capital.

On the other hand, the digital transformation brought about by the epidemic has given birth to the need for business model transformation, and M & An is one of the fastest ways to complete the transformation.

Three fund managers of the Capital Group, Scott Sikes, Greg Winter and David Dagger, analyzed the motivation behind the M & A deal, the impact on investors and industries, and talked about the recent hot SPAC deal.

Scott Sikes (fixed income Investment Manager):

Many companies' cash reserves are at an all-time high. Some industries, including cruise companies and hotel chains, have raised large amounts of money to tide over the COVID-19 epidemic; others have also taken advantage of the low interest rate environment to step up borrowing to raise more funds. Many investors expect companies to buy back stocks and bonds, make mergers and acquisitions, or a combination of all three. "

Generally speaking, M & A transactions are the key factor leading to credit risk. Large-scale M & A transactions are often completed by leveraging, which means an increase in risk. "

Greg Winter (Equity Investment Manager):

"because I have experienced too many failed cases, I am cautious about mergers and acquisitions involving changes in business models. Usually, companies will choose mergers and acquisitions when they cannot find new growth points. But the final success rate of this strategy is only 50%. "

Banks have always wanted to split the cake in the field of digital payment, but the COVID-19 epidemic has accelerated the popularity of contactless payment. Large online payment companies such as PayPal Holdings Inc continue to merge, but eventually it may be targeted by larger players. "

David Dagger (fixed income Investment Manager):

Companies in the energy sector often improve their industrial structure through mergers and acquisitions in order to make more profits. Now, governments are calling for energy conservation and emission reduction, many companies are starting to invest in renewable energy, while those traditional energy giants are looking for merger opportunities in the face of persistently low energy prices. "

Smart investors translated the full text of the report and shared it with you--

The coming wave of mergers and acquisitions-- an interpretation of five related issues

In the post-epidemic era, will mergers and acquisitions become a commercial main line? Usually, companies will rely on mergers and acquisitions to buy and sell assets or divestiture to change their business model, and we think 2021 will be the year of M & A transactions.

This year, in January and February alone, the amount of mergers and acquisitions involved reached 484.5 billion US dollars, an increase of 33% over the same period last year.

Greg Winter, a fund manager at the global small-cap fund of the capital group, says mergers and acquisitions are his favorite area of investing in small-cap stocks, and it is interesting to track some small companies and see which companies will eventually be the largest.

Of course, mergers and acquisitions are of great significance not only to small-cap stocks, but also to companies in the equity and bond markets as a whole. Given the importance of mergers and acquisitions, Winter and portfolio managers of other capital groups shared their views on five issues of the M & A boom:

1. Where does the momentum of M & A come from?

Mr Winter says many companies are slowly recovering from the 2020 epidemic and are more confident about the future, and some companies with strong balance sheets want to grow through mergers and acquisitions.

Many companies also have record cash reserves, says Scott Sykes, a fixed income investment manager. Some industries, including cruise companies and hotel chains, have raised large amounts of money to tide over the COVID-19 epidemic; others have also taken advantage of the low interest rate environment to step up borrowing to raise more funds.

Sikes points out that many investors expect companies to buy back stocks and bonds, make mergers and acquisitions, or a combination of all three.

2. How will the high valuation of equity assets affect M & A transactions?

Winter pointed out that the rising share price is a pleasant surprise for executives of listed companies, who want to take advantage of the stock price, such as replacing currency with shares in mergers and acquisitions, and in a booming market, overvalued stocks are often used for stock swaps.

Now the companies that choose to participate in M & A transactions are usually veteran M & A players with their own transaction models. If you focus on this area for a long time, you will not be surprised when you know that some companies are subsidiaries of large groups, or when you find that some mergers and acquisitions have been acquired.

David David Daigle, chief portfolio manager of the US High yield Trust, a capital group, believes that companies with high levels of leverage in some high-income industries will also take advantage of this opportunity to go public.

When asset prices are so overvalued, private equity firms are only small players in buying assets of listed companies, but they will bid very aggressively for assets spun off for transformation. But at the current valuation level, the probability of a premium takeover is not high, and you are unlikely to see a 30% premium for a stake in a listed company.

3. Is M & A good for investors?

Although companies often hype the value brought by mergers and acquisitions, in fact, many of them will end up being destroyed. The Harvard Business Review recently reminded management that some "once-in-a-lifetime" M & An opportunities will eventually hurt the company's interests.

Because he has experienced too many failures, Winter is cautious about mergers and acquisitions that involve changes in business models, and companies usually choose mergers and acquisitions when they can't find new sources of growth. but the ultimate success rate of this strategy is only 50%.

Overall, mergers and acquisitions are a key factor in credit risk, and large mergers and acquisitions are often done through leverage, which means increased risk, Sikes added. I will track mergers and acquisitions and avoid investing in companies that are too leveraged.

But good management and corporate governance can change that, and many executives have deep feelings for the company and value their commitment to maximum shareholder value. Winter's favorite example is that an airline chose to sell at a high price when it was doing well, and the company's CEO said he did not see the possibility of the company becoming the ultimate winner in this ever-consolidating industry.

Negative cases abound, too. Many companies rejected extremely generous bids in the golden age, but no one was willing to pay a high price when they wanted to sell their bodies after the decline.

4. Which industries will be rewritten by M & A transactions?

The digitization process of the whole industry has given birth to a lot of M & A transactions. The epidemic has accelerated the growth of high-tech companies, mainly large technology companies. Although the parent companies of Facebook Inc, Amazon.Com Inc and Alphabet Inc-CL C will not make large acquisitions under strict supervision, there are still a large number of small technology companies ready to move.

such asBanks have been hoping to split the cake in the field of digital payments, but the COVID-19 epidemic has accelerated the popularity of contactless payments. Large online payment companies such as PayPal Holdings Inc continue to merge, but eventually it may be targeted by larger players.

Game companies, including casino operators, are also looking for digital, online sports and gaming acquisitions, and Winter believes the industry is accelerating to maturity, making it much easier for existing users to spend more money than to develop new users.

The media industry will also face major changes. More and more people will cancel the limited television service, which is constantly leading to the transformation of the industry, and the competition in the field of content creation is becoming increasingly fierce. But whether some content production is suitable for streaming, Sikes still has doubts about whether Amazon.Com Inc, Netflix Inc and Walt Disney Company + will buy content like traditional TV stations such as CBS and ABC.

In addition, big pharmaceutical companies have a soft spot for small pharmaceutical companies that are about to be approved, and they have never stopped buying, and this year will be no exception.

In the field of medicine, innovative drug research and development is very scattered, and many small players are trying to overcome some hot diseases. Regardless of the macroeconomic situation, regulators will strive to control drug prices and impose strict restrictions on the patent period of key drugs, which is conducive to M & An activities.

Dag pointed out thatCompanies in the energy sector often improve their industrial structure through mergers and acquisitions in order to make more profits. Now, governments are calling for energy conservation and emission reduction, many companies are starting to invest in renewable energy, while those traditional energy giants are looking for merger opportunities in the face of persistently low energy prices.

5. What is the impact of SPAC?

The craze for buying companies for special purposes (SPAC) has received extraordinary attention, with sports stars such as Shaquille Shaquille O'Neal and Alex Rodriguez Rodriguez joining in, as well as big companies such as food company Post Holdings and medical device maker Medtronic PLC.

SPAC allows private companies to go public without tedious IPO procedures. Specifically, it works like this:

Publicly traded SPAC raised money in the market and then used the money to buy a private company. Under the formal IPO process, if a company wants to raise money from the public, it must provide sound paperwork-a small part of the effort to go public.

Last year, 380 SPAC raised a total of $106 billion, while SPAC raised about $32 billion in January 2021 alone. SPAC transactions are very active, which also shows that the channels for acquisition are also very large.

Mr Winter, who has invested in several SPAC, believes that this year's M & A deals will be very interesting because of the rise of SPAC, as SPAC usually needs to find a target within two years, otherwise the money raised will be returned.

This will bring many new companies into the capital market, which is good news for institutions with deep research capabilities.