B
iotech delivered some welcome news to a faltering
mergers and acquisitions market last month when
it was the focus of two multibillion-dollar deals:
Johnson & Johnson’s purchase of biotech developer
Momenta Pharmaceuticals for $6.5 billion in cash, and
Sanofi’s $3.4 billion agreement to buy San Francisco–
based Principia Biopharma. New Jersey–based J&J said
the Momenta deal provides an opportunity for its Janssen
Pharmaceutical subsidiary to broaden its leadership in
treating immune-mediated diseases. Sanofi, which has
a large budget for acquisitions, is on the hunt for more
biotechs.MERGERS & ACQUISITIONS
Biotech Keeps Bankers BusyThe two takeovers were a bright spot in a traditionally slow
month for a global M&A market that was already running at
a seven-year low. As economies grapple with the economic
disaster of the novel coronavirus, the value and number of M&A
deals worldwide have deflated.
“Some opportunistic deals are still occurring, but it will take a
bit more time for confidence levels to return to the boardroom
as deal makers assess post-Covid business models and valuations,”
says Matt Toole, director of deals intelligence at Refinitiv.
Yet, capital markets activity is keeping investment bankers
busy in the absence of big M&A deals. Corporate bond markets
shattered all-time records and equity capital-raising volumes
surged in the second quarter, Toole says.
IPO bankers skipped vacation this year, says William K.
Smith, CEO and co-founder of Renaissance Capital. Capital
raised from new listings set a record for the month of August.
And while the J&J and Sanofi deals were a rare bright spot for
M&A, they reflected a hot market in their own industry; four
health care IPOs came to market in a single week last month,
averaging a 39.9% return from their offer price. “With those
numbers, we expect the biotech boom to continue in the fall,”
Smith says.
The race for a vaccine and treatment for the coronavirus has
spurred interest in the biotech sector. German-based coronavirus
vaccine developer CureVac, backed by Bill Gates, soared 249%
in its Nasdaq debut on August 20, the largest first-day gain for
a US IPO in 15 years. —GPVECTORMINE / SHUTTERSTOCK.COMBANKING
Loan Clouds GatherU
S banks’ loan-loss charges are rising at shocking speed,
with the 5,116 FDIC-insured institutions reporting total
credit loss provisions of $52.7 billion in the first quarter, a
soaring 253% increase from only three months earlier. The second
quarter saw the drastic upward trend continuing, with just the top
four banks—JPMorgan Chase, Citigroup, Bank of America (BofA)
and Wells Fargo—posting $24.4 billion in provisions.
S&P Global is forecasting bank loan losses to reach $366 billion
for the US and Canada over the two years to the end of 2021.
The Fed’s June stress test on 34 major US banks revealed even
gloomier possibilities—losses ranging from $560 billion to $700
billion in various downside scenarios.
The downward spiral directly resulted from deteriorating
economic conditions and the implementation of the current
expected credit loss (CECL) accounting methodology, which
requires banks to recognize all losses expected over the life
of a financial instrument. CECL became effective for large
listed US banks at the start of 2020 and will be applicable
for all the rest in 2023. More than 240 US banks adopted CECL
in the first quarter.Between 1984 and 2007, credit-loss provisions were well
below $16 billion for all US financial institutions combined. In
the Great Recession, credit-loss
provisions spiked from $9 billion
in early 2007 to $71.15 billion by
late 2008. That number fell back
to around $14 billion four years
later and remained under that level.
Until now.
Bank earnings and bank stocks
have plunged. First-quarter
aggregate net income for FDIC-
insured institutions declined 69.6% from a year earlier. Warren
Buffett, a big fan of bank stocks, dumped billions of dollars’ worth
in the second quarter, including such luminaries as Wells Fargo,
Goldman Sachs and JPMorgan Chase.
Nevertheless, Berkshire Hathaway shelled out $2.1 billion on
BofA stock over 12 consecutive trading days, boosting its stake in
the banking giant to almost 12% as of August 4. “You can bet on
America,” Buffett said in livestreamed remarks to the company’s
annual meeting in May, “but you are going to have to be careful
on how you bet.” Wise words in any market.
—Anna Zhou64 | Global Finance | September 2020CORPORATE FINANCE & CAPITAL | CAPITAL MARKETS
METAMORWORKS / SHUTTERSTOCK.COM