Image Source: Glenn Beltz
By Brian Nelson, CFA
Mergers and acquisition [M&A] activity continues as the market sets new highs. Elevated borrowing costs as a result of the Fed’s aggressive rate hiking cycle in 2022 are pushing many entities to pursue all-stock transactions. We’ve previously discussed our thoughts on the Cisco (CSCO)/Splunk (SPLK) tie-up in this article here, which was an all-cash deal, but several other rather large acquisitions have been announced that are worth bringing to members attention.
On February 19, Capital One (COF) announced that it would acquire Discover Financial (DFS) in an all-stock $35.3 billion deal that would represent a 26.6% premium over Discover’s price as of February 16. The deal is expected to generate $2.7 billion in pre-tax synergies and be greater than 15% accretive to adjusted non-GAAP earnings per share in 2027. The deal is expected to deliver a return on invested capital of 16% in 2027, with an expected internal rate of return greater than 20%. We like the deal, but we very much prefer Visa and its more attractive business model that does not take on credit risk as our top credit-card-related idea.
Within the energy sector, Exxon Mobil (XOM) previously announced a merger with Pioneer Natural (PXD) in an all-stock transaction valued at $59.5 billion at the time, while Chevron (CVX) announced its intent to acquire Hess Corp. (HES) in an all-stock deal worth ~$53 billion. We like that both the XOM/PXD and CVX/HES deals are all-stock proposals as it allows the combined entity to avoid building up too much debt/leverage on the books. However, the wheeling and dealing in the energy space may signal that organic opportunities are becoming less favorable for big oil than scooping up smaller publicly traded operations using stock as the currency. Both mega deals were announced October 2023.
As Boeing (BA) continues to face public backlash from its missteps with its 737 program, the firm is re-thinking its outsourcing strategy. On March 1, it was confirmed that Boeing is in talks to acquire jet-fuselage supplier Spirit AeroSystems (SPR). The deal, itself, would not be strategic in nature, but rather one that is targeted to bring more of the supply chain under Boeing’s control. We don’t expect the transaction to accomplish much in terms of synergies, and any deal will likely increase the capital-intensity of Boeing. We’re huge fans of the visibility in the backlogs at Boeing and Airbus (EADSY), but we won’t be adding either Boeing or Airbus to the newsletter portfolios anytime soon. Our favorite aerospace supplier is Honeywell (HON).
———-
Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, RSP, SCHG, QQQ, QQQM, and VOO. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.