52 Business The EconomistJuly 25th 2020
N
othing epitomisesthe animal spirits
that drive capitalism as neatly as
mega-mergers. As covid-19 spread, compa-
nies appeared to be practising the cor-
porate version of social distancing: seldom
since the aftermath of the global financial
crisis of 2007-09 had takeover activity been
so subdued. Now dealmakers are slowly
emerging from lockdown.
A spate of deals this month suggests
that bankers and lawyers specialising in
mergers and acquisitions (m&a) may want
to hold off booking summer holidays. On
July 20th Chevron announced it would be
paying $13bn for Noble Energy, a smaller
oil-and-gas rival. A day later Adevinta, a
Norwegian company, said it would extend
its classified-ads empire by snapping up a
unit of eBay worth $9.2bn. A week earlier
Analog Devices agreed to pay $19.8bn for
Maxim Integrated, another chipmaker.
That is quite a change from the first half
of the year. A weak start to 2020 at first
looked like a blip in an otherwise bullish
m&acycle going back to 2014 (see chart). By
the time covid-19 reached Europe and
America in March, the blip had turned into
a slump. Barely $500bn-worth of deals
were announced in the second quarter,
compared with over $1trn a year earlier, ac-
cording to Refinitiv, a data firm. Mega-
deals over $5bn fell even more steeply.
At the height of the crisis, companies
were reasonably preserving cash rather
than looking for new ways to spend it. Un-
certainty over the performance of potential
targets made dealmaking risky. Complex
m&atransactions—big ones can take morethan a year to close—are tricky to pull off
over Zoom. Regulators who clear them
were also hobbled by the pandemic. Many
planned deals fell apart. On March 31st Xe-
rox ditched its $35bn hostile pursuit of hp,
a bigger office-systems rival. Boeing
shelved a putative acquisition of most of
Embraer’s commercial-aviation unit in
April, after its own prospects darkened as a
result of the pandemic hit to air travel.
But the virus did not snuff out animal
spirits entirely. t-Mobile and Sprint, two
American mobile operators, merged as
planned in April, calculating that the bene-
fits of consolidation outweighed the risks.
Just Eat and Grubhub announced a food-
delivery tie-up in June. Aon’s planned
$30bn purchase of Willis Towers Watson, a
smaller insurance broker, is on.
It helped that some sellers discreetly
agreed to offer buyers better terms. Law-
yers have pored over documents to see
whether a global pandemic is sufficient
grounds to scupper a takeover, a point
which judges will no doubt be required to
opine on soon. On July 18th EssilorLuxot-
tica, a Franco-Italian eyewear giant, sued
GrandVision, a retailer it had agreed to take
over a year ago, arguing it is not being given
enough information on recent trading.
GrandVision denies this is the case, but its
shares are now trading below the price at
which it had agreed to be bought out.
A second wave of covid-19 may upset the
revival. So could rising protectionism,
which hampers cross-border deals. But
m&abankers are bullish about the rest of
the year. Firms whose profits have held up
are likely to be first to return to dealmak-
ing, says Eamon Brabazon of Bank of Amer-
ica. With good options for parking money
scarce, lenders are happy to bankroll take-
over bids by strong suitors. Private-equity
funds can draw on a record $1.5trn of their
investors’ money, according to Preqin, a
data provider. They are hunting for bar-
gains. Even grim economic conditions
worldwide have a silver lining for the ac-
quirers, if these force struggling targets
into a sale whether they like it or not. 7PARIS
Corporate dealmakers emerge from
pandemic hibernationMergers and acquisitionsWakey, wakey
Dealing with covid-19
Worldwidemergers&acquisitionsSource:Refinitiv151296301.51.20.90.60.30
2017151311092007Value, $trn Number of deals, ’000C
hinese liketo quip that the electronic
cigarette is China’s fifth great inven-
tion, after paper, printing, gunpowder and
the compass. A Chinese pharmacist
hatched the idea in 2003 to wean smokers
off tobacco. But it was in America, home to
brands like Juul and Blu, that vaping first
took off. Although one in four Chinese
adults smoke tobacco, sales of e-cigarettes
in China amounted to $2.7bn last year, a
tenth of those in America, according to
Frost and Sullivan, a consultancy.
Investors spy an opportunity. The mar-
ket value of Smoore, China’s biggest e-ciga-
rette maker, has nearly tripled since its ini-
tial public offering in Hong Kong on July
10th. It is now the world’s most valuable
vape firm, worth around $24bn, more than
the privately held Juul, most recently val-
ued at $13bn. Smoore made a tidy pre-tax
profit of 2.6bn yuan ($371m) in 2019, mainly
from exporting components to foreign
brands. It also hawks branded devices.
Investor optimism derives in large part
from the prospect of rapid growth in China,
where just 10m people were regular users
of e-cigarettes at the end of last year. But
dig a little deeper and the outlook darkens.
A powerful state-owned cigarette monopo-
ly, China Tobacco, will not cede ground to a
rival product without a fight.
Regulators have already intervened on
behalf of China Tobacco, which paid 1.2trn
yuan in taxes last year, accounting for 6%
of government revenues. In November the
authorities banned online sales of e-ciga-
rettes (ostensibly to prevent minors from
buying them). Now they can be bought
only at physical outlets like convenience
stores and karaoke bars. In recent months
editorials in state-owned newspapers have
claimed (falsely) that vaping is more harm-
ful than conventional cigarettes. A spokes-
man for the Electronic Cigarette Industry
Committee of China, a trade body, blames
the online ban for a wave of bankruptcies
among smaller firms.
Bigger names like Smoore and relx,
both based in Shenzhen, face another pro-
blem. China Tobacco has already opened a
lab in Shanghai to research e-cigarettes. If
it concludes that vaping is here to stay, it
too may get in on the action. It boasts a na-
tionwide network of retail stores, and add-
ing a new product to the mix would not be
difficult. Cannibalising sales of ciggies
may seem sensible if the alternative is los-
ing millions of customers to rivals. 7A state tobacco monopoly looms over
China’s successful e-cigarette makersVapingPuff piece