April 20, 2017

Keep it 100

by Breakingviews

There just might be $100 billion of cash looking for a deal. JPMorgan’s global mergers chairman, Kurt Simon, recently dangled the audacious notion that the capital markets could fully finance a 12-figure acquisition. He didn’t suggest such a transaction was in the works, though, and there aren’t many plausible targets.

Simon’s exuberance is understandable. A record $6.6 trillion of debt was raised globally last year, about half of it the investment-grade corporate variety, according to Thomson Reuters data. JPMorgan helped arrange more of these dollars than any other bank. And just over six months ago, Bayer clinched its takeover of U.S. seeds producer Monsanto in the largest-ever all-cash deal at $66 billion.

It’s nevertheless a big leap to the sum Simon suggested among his “2017 predictions,” even if he hedged it with a question mark. A scan of S&P 500 Index constituents turns up a few dozen companies in the $60 billion to $90 billion range, leaving room for a premium. Some, including DuPont and Time Warner, are already spoken for in deals. Others, such as Goldman Sachs and Starbucks, would be challenging takeover targets.

The list also includes retailers Lowe’s and Walgreens, arguably more appealing to strategic buyers using at least some stock. Elsewhere, one intriguing target could be Abbott Laboratories. The $75 billion medical-device maker recently bought St. Jude Medical, adding over $14 billion in net debt to its balance sheet, according to estimates culled by Thomson Reuters. The combination should produce over $7 billion of EBITDA next year.

To stretch the hypothesis further, Johnson & Johnson is one of few plausible buyers. The $320 billion conglomerate, which reported disappointing first-quarter results on Tuesday, might be reluctant to use shares for fear of diluting earnings. And it will retain its AAA credit rating even after agreeing to buy Swiss drugmaker Actelion. That leaves J&J among the handful of companies – other examples being Apple, Microsoft and Pfizer – capable of matching JPMorgan’s acquisition funding blueprint of $50 billion in investment grade bonds, $25 billion of bank debt and $25 billion of commercial paper.

This imagined combination would represent a strategic reversal for J&J, which decided in 2011 to exit the market for artery-opening stents in which Abbott competes. Moreover, any real-world all-cash acquisition on this scale would be fraught with pitfalls. A deal remains more theoretical than the market’s appetite for one.

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