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Banc of California Inc.’s proposed agreement to acquire PacWest Bancorp. helped send regional-bank stocks considerably higher on Wednesday. But even after a two-day increase of 12% for its shares, the acquiring bank remains the favorite name among analysts covering regional players in the U.S.
The merger agreement was announced after the market close on Tuesday, but the rumor mill had already sent Banc of California’s
BANC,
stock up by 11% that day. Then on Wednesday, shares of PacWest Bancorp
PACW,
shot up 27% to $9.76, which was above the estimated takeout value of $9.60 a share when the deal was announced. The merger deal, if approved by both banks’ shareholders, will also include a $400 million investment from Warburg Pincus LLC and Centerbridge Partners L.P.
A screen of regional banks by rating and stock-price target is below.
Deal coverage:
With PacWest closing above the initial per-share deal valuation, it is fair to wonder whether or not its shareholders will vote to approve the agreement. In a note to clients on Wednesday, Wedbush analyst David Chiaverini called Banc of California’s offer “fair, but not overwhelmingly attractive,” and wrote that PacWest was “a likely seller before the mini banking crisis occurred in March.”
While Chiaverini went on to predict the deal’s approval by PacWest’s shareholders, he added that he “wouldn’t be surprised if there were some dissent among a minority of shareholders [which could] possibly open the door to the potential emergence of a third-party bid.”
More broadly, Odeon Capital analyst Dick Bove wrote to clients on Wednesday that the merger deal, along with increasing involvement of private-equity firms in lending businesses, the expected enhancement of regulatory capital requirements for banks and other factors could lead to more consolidation among smaller banks.
He went on to write that we might be entering a period for the banking industry similar to the 1990s, “when rules were being changed and acquisitions were rampant,” which “created new investment opportunities.”
The SPDR S&P Regional Banking exchange-traded fund
KRE,
rose 5% on Wednesday but was still down 17% for 2023, while the SPDR S&P 500 ETF Trust
SPY,
was up 19%, both excluding dividends.
KRE holds 139 stocks, with 98 covered by at least five analysts working for brokerage firms polled by FactSet. Out of those 98 banks, 45 have majority “buy” ratings among the analysts. Among those 45, here are the 10 with the most upside potential over the next 12 months, implied by consensus price targets:
| Bank | Ticker | City | Total assets ($mil) | July 26 price change | Share buy ratings | July 26 closing price | Consensus price target | Implied 12-month upside potential |
| Banc of California Inc. |
BANC, |
Santa Ana, Calif. | $9,370 | 1% | 71% | $14.71 | $18.58 | 26% |
| Enterprise Financial Services Corp. |
EFSC, |
Clayton, Mo. | $13,871 | 2% | 80% | $41.75 | $49.25 | 18% |
| First Merchants Corp. |
FRME, |
Muncie, Ind. | $17,968 | 4% | 100% | $32.38 | $37.33 | 15% |
| Amerant Bancorp Inc. Class A |
AMTB, |
Coral Gables, Fla. | $9,520 | 3% | 60% | $20.26 | $23.30 | 15% |
| Old Second Bancorp Inc. |
OSBC, |
Aurora, Ill. | $5,884 | 3% | 100% | $16.15 | $18.50 | 15% |
| F.N.B. Corp. |
FNB, |
Pittsburgh | $44,778 | 3% | 75% | $12.91 | $14.50 | 12% |
| Columbia Banking System Inc. |
COLB, |
Tacoma, Wash. | $53,592 | 4% | 55% | $22.63 | $25.32 | 12% |
| Wintrust Financial Corp. |
WTFC, |
Rosemont, Ill. | $54,286 | 3% | 92% | $86.05 | $95.33 | 11% |
| Synovus Financial Corp. |
SNV, |
Columbus, Ga. | $60,656 | 6% | 75% | $34.06 | $37.73 | 11% |
| Home BancShares Inc. |
HOMB, |
Conway, Ark. | $22,126 | 5% | 57% | $24.09 | $26.67 | 11% |
| Source: FactSet | ||||||||
Click on the tickers for more about each bank.
Any stock screen can only be a starting point when considering whether or not to invest. If you see any stocks of interest here, you should do your own research to form your own opinion.
Don’t miss: How you can profit in the stock market from an incredible financial-services trend over the next 20 years
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PacWest Bancorp’s stock jumped more than 38% in after-hours trading Tuesday after the company said it had agreed to be acquired by Banc of California Inc. in an all-stock merger backed by two private-equity firms. The merger comes as PacWest looks to put a rocky period behind it.
Under the terms of the merger agreement, PacWest
PACW,
stockholders will receive 0.6569 of a share of Banc of California common stock for each share of PacWest common stock. Based on closing prices on Tuesday, the deal values PacWest at $9.60 a share, a premium over its closing price of $7.67 a share on Tuesday.
Warburg Pincus and Centerbridge will provide $400 million in equity.
PacWest stockholders will own 47% of the outstanding shares of the combined company, while the private-equity investors will own 19% and Banc of California shareholders will have 34%.
PacWest said that it is the company being acquired and that it will change its name to Banc of California. PacWest said it will be the “accounting acquirer,” with fair-value accounting applied to Banc of California’s balance sheet at closing.
Banc of California CEO Jared Wolff will retain the same role at the combined company.
The combined company will repay about $13 billion in wholesale borrowings to be funded by the sale of assets, “which are fully marked as a result of the transaction, and excess cash,” the companies said.
The merged company is currently projecting about $36.1 billion in assets, $25.3 billion in total loans, $30.5 billion in total deposits and more than 70 branches in California.
John Eggemeyer, the independent lead director at PacWest, will be chair of the board of the combined company following the merger.
The board of directors of the combined company will consist of 12 directors: eight from the existing Banc of California board, three from the existing PacWest board and one from the pair of private-equity firms led by Warburg Pincus.
Citing sources close to the deal, the Wall Street Journal had reported earlier that a tie-up was imminent.
In regular trading Tuesday, PacWest’s stock ended 27% down; trading was halted for volatility following the report of the deal.
Banc of California’s stock rose 11% but was later halted for news pending as well. The stock rose more than 9% in after-hours trading on Tuesday.
At last check, PacWest’s market capitalization was about $1.2 billion, while Banc of California’s was about $764 million. Combined, the business would be worth about $2 billion.
PacWest’s big share-price move on Tuesday marks the latest in a volatile few months for the Beverly Hills, Calif., bank, which was founded in 1999.
Investors had speculated that the bank could be the next to fail after Silicon Valley Bank and Signature Bank failed in March and First Republic Bank was taken over by JPMorgan.
Also on Tuesday, PacWest said it lost $207.4 million, or $1.75 a share, in its second quarter, as it got a hit from items related to loan sales and restructuring of its lending unit Civic. The loss contrasts with earnings of $122 million, or $1.02 a share, in the year-ago period.
Analysts polled by FactSet expected the bank to report a loss of 58 cents a share in the quarter.
PacWest disclosed in recent months that it was exploring strategic alternatives while it sold off parts of its business to raise cash to strengthen its balance sheet. It sold a loan portfolio to Ares Management Corp.
ARES,
in a move to generate $2 billion.
It also sold a portfolio of loans to Kennedy-Wilson Holdings Inc.
KW,
which then sold part of the portfolio to Canada’s Fairfax Financial Holdings Ltd.
FFH,
Also read: PacWest sparks regional-bank rally after unveiling plan to sell loans worth $2.6 billion
In May, PacWest sold its real-estate lending portfolio to Roc360.
Also in May, PacWest’s stock dropped more than 20% after it said it had lost 9.5% of its deposits amid market volatility.
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Tupperware Brands Corp. shares enjoyed their best day on record Monday despite an apparent absence of news related to the beleaguered seller of kitchen and home products.
The stock shot up more than 75% Monday in meme-like trading action and amid vastly higher-than-average volume. The surge marked Tupperware’s
TUP,
largest one-day percentage gain yet, surpassing the prior record of a 67.7% increase on July 29, 2020, according to Dow Jones Market Data.
Just shy of 130 million Tupperware shares changed hands on the day, easily breaking the record of 42.7 million shares traded, also set on July 29, 2020. The name’s 30-day average volume is about 2.4 million shares.
The stock finished Monday at $1.58 to record its highest close since April 6, 2023, according to Dow Jones Market Data.
Tupperware shares remain off 62% so far in 2023 amid serious challenges for the company. It issued a going-concern warning in April and disclosed that it has hired financial advisers, and it said earlier in the year that it had discovered misstatements in past financial reports.
Don’t miss: Why investors gamble on shares of bankrupt companies — Bed Bath & Beyond, for example
The company’s website doesn’t appear to show any recent filings or press releases that would have driven Monday’s stock move. Tupperware didn’t immediately respond to a MarketWatch request for comment about the day’s trading activity.
Tupperware’s stock is up 136% over a two-session span, with the rally coming as investors don’t necessarily seem spooked by companies sporting bankruptcy risk. Used-car retailer Carvana Co.
CVNA,
once thought to be on the brink of failure, has seen its shares come roaring back this year, up nearly 900% over the course of 2023.
See more: Carvana’s stock has roared back from the brink. This chart shows its meteoric surge.
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Shares of Digital World Acquisition Corp.
DWAC,
the special purpose acquisition company (SPAC) looking to take Donald Trump’s Truth Social media company public, soared 20% in premarket trading Friday, after the SPAC reached a settlement with the Securities and Exchange Commission over fraud charges. The rally put the stock on track to open around the highest-price seen during regular-session hours since Feb. 6. The agreed upon settlement was a $18 million civil penalty fee in the event that it completes its planned merger with the Trump Media and Technology Group (TMTG) and takes it public. The SPAC, which went public in September 2021, and entered into an agreement in October 2021 to buy TMTG. The SPAC’s stock has tumbled 59% over the past 12 months, while the S&P 500
SPX,
has gained 13.4%.
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Sirius XM Holdings stock surged 42% Thursday on an apparent combination of short covering, an unwinding of a spread trade involving Liberty SiriusXM, and possible buying related to a rebalancing of the Nasdaq 100 index.
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Funds associated with Cathie Wood’s ARK Investment continued to cull shares of Coinbase Global Inc. and Tesla Inc. on Monday, according to recent trade disclosures.
The ARK Fintech Innovation ETF
ARKF,
dumped 76,788 Coinbase shares
COIN,
on the day, while the ARK Innovation ETF
ARKK,
sold 127,266 and the ARK Next Generation Internet ETF
ARKW,
sold 44,784 shares.
Those were worth $26.3 million based on Coinbase’s Monday closing price of $105.55, and the sales follow ARK’s move to dump about $50 million in Coinbase’s stock Friday.
Coinbase represents 0.78% of the Fintech Innovation ETF, along with 0.15% of the Innovation ETF and 0.30% of the Next Generation Internet ETF. ARK disclosed the transactions and weightings in the daily trade notifications it posts to its website.
Read: Coinbase’s spectacular stock surge after Ripple ruling sparks fierce debate
Meanwhile, the ARK Innovation ETF shed 38,329 Tesla shares
TSLA,
on Monday, while the ARK Next Generation Internet ETF sold 6,855. Those shares were worth $13.1 million based on Tesla’s Monday closing level of $290.38. Tesla represents about 0.12% of both funds as they continue to unload shares.
Don’t miss: Tesla is looking at its best sales quarter ever
ARK scooped up 455 shares of Meta Platforms Inc.
META,
within its Next Generation Internet ETF and bought up 3,729 shares within the ARK Innovation ETF. That amounted to $1.3 million worth of stock based on Meta’s $310.62 Monday close.
Two ARK funds bought a combined $790 million in Robinhood Markets Inc.’s stock
HOOD,
with the fintech fund scooping up 25,641 shares and the Next Generation Internet ETF buying 37,630 shares. ARK added 4,608 shares of SoFi Technologies Inc.
SOFI,
to the fintech fund, worth $43,683 based on Monday’s close.
See also: SoFi’s stock catches another downgrade as analyst says it ‘needs to be valued more like a bank’
ARK was also active in shares of Twilio Inc.
TWLO,
buying 15,702 within the Fintech Innovation ETF, 133,499 within the Innovation ETF and 22,748 within the Next Generation Internet ETF. That amounted to $11.4 million in Twilio’s stock based on Monday’s $66.47 closing price.
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Shares of AT&T Inc. were falling again Monday after a Citi Research analyst weighed in with a more cautious view in light of recent reporting on legacy use of lead-sheathed cables within the telecommunications industry.
Citi’s Michael Rollins cut his rating on AT&T’s stock
T,
to neutral from buy Monday, writing that it was among names that could see an “overhang” following The Wall Street Journal’s recent reporting on risks related to industry’s historical use of lead-sheathed cabling as Wall Street works to understand potential financial implications.
He also downgraded shares of Frontier Communications Parent Inc.
FYBR,
and Telephone & Data Systems Inc.
TDS,
to neutral from buy, and he already had a neutral rating on Verizon Communications Inc.’s stock
VZ,
“First, copper network deployed with possible lead sheathing could be a significant percentage of the legacy network deployed nationally with varying exposures for each firm,” Rollins wrote. He said he was “unable to specifically quantify financial risks (if anything material)” for wireline telecommunications companies stemming from these issues, though “the timing to receive more information could take at least a couple months and full resolution could take years.”
AT&T’s stock was off 3.8% in Monday morning action, to a recent $13.95, and on track to close at its lowest level since March 24, 1993, according to Dow Jones Market Data. The stock is on pace to spend a ninth-straight session without a daily gain, factoring in one day of flat performance last week alongside a string of daily losses.
“We still expect the company to display forward progress on cash flow generation and setting the stage to reduce net debt leverage over the next two years before considering any potential liabilities, if anything material, associated with lead sheathed cables,” Rollins wrote, though he called out “uncertainty from the industry’s use of lead-sheathed cabling” as a key reason for the downgrade.
Frontier shares were down 8.2%, while TDS shares were off 5.0%. Verizon’s stock was down 1.6% and on pace for its eighth consecutive losing session.
USTelecom, a trade association that counts AT&T and Verizon as members, said in a statement that the telecommunications industry “has a long tradition of closely following science and evidence as it relates to public health, environmental protection, and worker safety issues,” while “safe work practices within the industry have proven effective in reducing potential lead exposures to workers.”
There are “many considerations” that go into deciding whether to remove legacy cables, “including those regarding the safety of workers who must handle the cables, potential impacts on the environment, the age and composition of the cables, their geographic location, and customer needs as well as the needs of the business and infrastructure demands,” the spokesperson continued.
The trade group said in a prior statement that it had “not seen, nor have regulators identified, evidence that legacy lead-sheathed telecom cables are a leading cause of lead exposure or the cause of a public health issue.”
Representatives from Frontier and TDS couldn’t immediately be reached for comment.
Rollins noted in his report that “Verizon and AT&T indicated their expectation as that the exposure should be small,” though he said that “for Verizon, we learned the term ‘small’ could be as much as 20% of its copper network infrastructure.”
Don’t miss: Verizon CEO says the wireless market isn’t such a bad business after all
He joined JPMorgan’s Philip Cusick, who downgraded AT&T’s stock Friday and mentioned potential lead-cable liabilities as a concern.
SVB MoffettNathanson analyst Craig Moffett weighed in on the issue as well Monday, calling out heavy uncertainty.
“The unsatisfying, but honest, answer is that at this point we have nothing but unknowns to work with and no real way to quantify the companies’ exposures,” he wrote. “Lead risk is clearly not a good thing, but we don’t know how bad it will ultimately be. It would be disingenuous to try putting firm numbers around it.”
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The Federal Trade Commission on Thursday asked an appeals court to temporarily block Microsoft Corp.’s $69 billion acquisition of Activision Blizzard Inc. while it challenges a ruling earlier this week green-lighting the deal.
The FTC on Thursday asked U.S. District Judge Jacqueline Scott Corley to postpone her ruling — which she promptly denied — and also appealed to the Ninth U.S. Circuit Court of Appeals in San Francisco to pause the acquisition “to preserve the status quo” while the case is reviewed, claiming it is likely to succeed in its appeal.
According to the filing, the FTC claims the judge applied the wrong legal standard to its request for a preliminary injunction, and erred in a number of other matters.
The deal is set to close in the coming days, and letting it happen will “irreparably harm the public interest and the FTC,” regulators said.
Also see: GOP blasts FTC Chair Khan as a ‘bully’ after agency’s loss in Microsoft case
In a response filed with the court, Microsoft said the FTC “failed to carry its burden on independent, fact-based grounds” and “dragged its heels” before appealing.
“The court has already found that it would be inequitable” to order an injunction that could lead to “the potential scuttling of the merger,” Microsoft said, in asking for the FTC’s request to be denied.
The FTC has claimed the tie-up of a major videogame platform — Microsoft’s
MSFT,
Xbox — with a major videogame publisher — Activision
ATVI,
makes the wildly popular “Call of Duty,” among other titles — would be harmful to the videogame industry and consumers.
Microsoft has pledged to keep “Call of Duty” available to Sony’s
SONY,
PlayStation console for 10 years, and will make it available for Nintendo’s
7974,
Switch and some cloud-gaming platforms.
In her ruling clearing the deal Tuesday, Corley said the FTC did not show “this particular vertical merger in this specific industry may substantially lessen competition.”
Bloomberg News reported late Thursday that Microsoft and Activision are considering giving up some control of their cloud-gaming business in the U.K. to win approval of British regulators, who — if the U.S. appeals court does not act — are the final hurdle to the deal closing on time.
FTC Chair Lina Khan testified on Capitol Hill on Thursday, where Republican lawmakers assailed her actions and sharply criticized her agency’s court losses in trying to block the Microsoft-Activision deal and Meta’s
META,
acquisition of a virtual-reality gaming company earlier this year.
Read more: After Microsoft defeat, ‘toothless’ FTC needs to pick better battles if it wants to rein in Big Tech
Also: FTC’s probe of OpenAI marks key moment in Khan’s push to rein in Big Tech
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The Federal Trade Commission late Wednesday filed notice that it will appeal a judge’s ruling this week that gave Microsoft Corp. the green light to proceed with its $69 billion acquisition of Activision Blizzard Inc.
In a filing with the Ninth Circuit Court of Appeals in San Francisco, the FTC is seeking to overturn U.S. District Judge Jacqueline Scott Corley’s ruling Tuesday, which said the deal would not hurt competition.
“The District Court’s ruling makes crystal clear that this acquisition is good for both competition and consumers,” Brad Smith, Microsoft’s vice chair and president, said in a statement.” We’re disappointed that the FTC is continuing to pursue what has become a demonstrably weak case, and we will oppose further efforts to delay the ability to move forward.”
The FTC has claimed the tie-up of a major videogame platform — Microsoft’s
MSFT,
Xbox — with a major videogame publisher — Activision
ATVI,
makes the wildly popular “Call of Duty,” among other titles — would be harmful to the videogame industry and consumers.
“The facts haven’t changed,” an Activision spokesperson said Wednesday. “We’re confident the U.S. will remain among the 39 countries where the merger can close. We look forward to reinforcing the strength of our case in court, again.”
Microsoft has pledged to keep “Call of Duty” available to Sony’s
SONY,
PlayStation console for 10 years, and will make it available for Nintendo’s
7974,
Switch and some cloud-gaming platforms.
The deal faces a July 18 deadline, and still must gain regulatory approval in the U.K.
Tuesday’s ruling was yet another antitrust setback for the FTC, which has failed to do much to rein in Big Tech, and one analyst told MarketWatch on Tuesday that the regulators need to do ” a much better job of picking their battles,”
Read more: After Microsoft defeat, ‘toothless’ FTC needs to pick better battles if it wants to rein in Big Tech
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The European Commission has approved Broadcom Inc.’s
AVGO,
acquisition of VMware Inc.
VMW,
sending VMware’s stock up 2.3% premarket. Broadcom, which makes chip and infrastructure software, announced the $61 billion deal to buy VMware in May 2022, but the deal has been the subject of regulatory scrutiny ever since. It has now been granted legal merger clearance in Australia, Brazil, Canada, South Africa, and Taiwan, and foreign investment control clearance in all necessary jurisdictions, the company said Wednesday. Broadcom “looks forward to continuing to work constructively with regulators around the world. Broadcom is confident that when regulators conclude their review, they too will see that the combination of Broadcom and VMware will enhance competition in the cloud and benefit enterprise customers by giving them more choice and control over where they locate their workloads,” said the company. It still expects to close the deal in fiscal 2023. Broadcom’s stock was up 0.6% premarket.
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The U.S. Federal Trade Commission’s defeat as it sought to block Microsoft Corp.’s acquisition of videogame maker Activision Blizzard is yet another setback for an increasingly toothless regulator that needs to pick better battles with Big Tech.
On Tuesday morning, a federal judge denied the FTC’s injunction that was seeking to block the software giant’s proposed $69 billion acquisition of Activision
ATVI,
best known for its hit videogame “Call of Duty.” The FTC argued that Microsoft
MSFT,
could withhold “Call of Duty” and other Activision games from rival console platforms such as Sony’s PlayStation, and keep the games on its Xbox only.
Microsoft, in a show of faith, committed in writing to keep “Call of Duty” on PlayStation on parity with Xbox for 10 years, agreed with Nintendo
7974,
to bring “Call of Duty” to Switch and entered into several pacts to bring Activision content to several cloud gaming services, U.S. District Court Judge Jacqueline Scott Corley noted in her decision.
“With these 10-year contracts that Microsoft made across the board with so many vendors, Nvidia
NVDA,
Nintendo and others, 10 years is a really long time, in my opinion,” said Sarah Hindlian-Bowler, an analyst at Macquarie Equity Research, in an interview Tuesday. “It is long enough to cover the arrival and maturity of the cloud gaming market….She understands that 10 years is a very long long time to make a guarantee of this kind.”
Also read: Regulators face an antitrust dilemma after Meta launches Threads
Hindlian-Bowler said that she had been in the minority of Wall Street analysts in not believing the U.S. government would be able to block this deal.
“The assumption that this somehow decreases the market is going to prove to be wildly incorrect,” she said, adding that she does not believe that the U.K.’s Competition and Markets Authority will be able to block the deal either.
The latest upset at the FTC was also not too surprising to other Capitol Hill watchers, especially in the light of other high-profile setbacks by the agency and its once-heralded commissioner, Lina Khan. When she was sworn in as chair of the FTC in mid-2021, Khan was hailed as the sheriff who would rein in Big Tech.
“It’s hard to say I am surprised by the ruling because Khan has had a fairly unsuccessful track record,” said Owen Tedford, a senior research analyst at Beacon Policy Advisors. “The regulators are pushing the boundaries, deals that previously would have gone unchallenged have now gone challenged. And they are breaking precedent because Khan and company have expressed a dislike of settlements.”
The FTC’s attempts to sue Meta Platforms Inc.
META,
have had some defeats so far. In February, a California judge denied the FTC’s attempts to block Meta from buying a virtual-reality startup called Within Unlimited. The FTC’s suit to reverse Meta’s acquisitions of WhatsApp and Instagram, filed in 2021, is still plodding along.
Additionally, the FTC recently filed a suit against Amazon.com Inc.
AMZN,
alleging that it is too difficult for consumers to cancel their Prime accounts, and the agency is reportedly also mulling another far-reaching suit against Amazon alleging that the e-commerce giant punishes merchants who do not use its logistics services. One analyst has already made a case that the FTC will lose that fight too.
“I think that the FTC is in need of some change, in need of some refreshing and in need of doing a much better job of picking their battles,” said Hindlian-Bowler. “This does feel toothless, a lot of the fights they are picking are toothless. And unfortunately, they are missing the real battle. They are missing TikTok, they are missing the real fights where we actually have national security at risk.”
In February, one of the Republican commissioners on the FTC resigned, and wrote an op-ed in the Wall Street Journal accusing Khan of disregarding the rule of law and due process.
Compared to the European Union, which has had far more success implementing regulation to rein in Big Tech, the U.S. is still much weaker. “The EU seems to be having somewhat more success, levying big fines, getting these companies to change,” said Beacon’s Tedford. “The EU has passed these bills, but the U.S., despite these efforts, has not gotten there and is not going to get there for the next two years.”
Money spent by Big Tech to lobby Congress in a huge part of the problem, whereas in Europe, “those lawmakers feel less beholden,” he added.
More than a century ago, President Teddy Roosevelt, known for his “speak softly and carry a big stick” foreign policy, also used his bully pulpit to bust industrial monopolies.
If Khan and her staff want to follow his lead and rein in Big Tech, they need to start picking their future battles more carefully — and carry bigger sticks.
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FTC Loses First Bid to Block Microsoft’s Acquisition of Activision Blizzard. The Focus Turns to U.K. Regulators.
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Opinions expressed by Entrepreneur contributors are their own.
Mergers and acquisitions (M&A) have become increasingly popular among large corporations as a business strategy. However, small and medium-sized businesses may hesitate to engage in M&A due to the perceived complexities and risks involved. This shouldn’t necessarily be the case.
M&A refers to the process of combining two or more companies to form a new entity, or to have one company take over another. It is true that M&A carries inherent risks and the process can be intricate, but in many cases, the benefits far outweigh these hurdles. M&A can be a strategic move for large and small companies looking to expand their business operations, gain a competitive advantage or enter new markets.
Throughout my career, I have completed more than 20 successful deals — M&A is a strategy I have employed time and time again. These purchases have accelerated our growth, allowed us to expand into new industries and markets, and they afforded us new expertise, technologies and increased the services we are able to offer our customers.
Here are five reasons I think small and medium-sized businesses should consider M&A as a growth strategy.
Related: Cultural Fit Can Make or Break an M&A Deal
M&A can provide access to new markets and new customers. Customer acquisition can be costly, both in time and resources, but acquiring a company often comes with established customers that are already familiar with the products and services offered. This can be especially useful for expanding geographically or into new industries.
For example, a software company that specializes in sales management tools may acquire a project management software company to gain access to a new market. It is a huge benefit if the acquired company has an established customer base in a different geographical region or industry, which can help the acquiring company expand its reach and diversify its offerings.
Additionally, acquiring a company in a different market can provide a brick-and-mortar presence and a foothold there.
There are significant cost savings and economies of scale that can be achieved through M&A. By merging with another company and combining resources and operations, they can eliminate redundancies, streamline processes and benefit from synergies — such as shared overhead costs, reduced administrative expenses and improved purchasing power.
This can increase profitability which is vital for smaller companies with limited resources. Additionally, by leveraging the strengths and resources of both organizations, the company can create a more efficient and effective business model.
By acquiring a business that offers complementary products or services, a company can expand its offerings and potentially tap into new revenue streams.
For example, a company that sells office supplies may acquire a printing services company. By offering a more comprehensive solution, the company can differentiate itself from its competitors and can also provide opportunities for cross-selling and up-selling.
In that same example, the office supplies company can then promote its printing services to its existing customer base and vice versa, helping to increase sales and customer retention.
Related: Successful M&A Strategies for Startups
An acquisition can create an opportunity to level up or add talent across the organization with highly skilled employees.
With the staff of both organizations combined into one, the merged organization can benefit from a more diverse and skilled workforce. Additionally, the company can acquire new expertise.
For instance, a marketing agency may acquire a search engine optimization company to boost its digital marketing capabilities. Access to new technologies or expertise can help drive innovation and growth.
Related: 7 Strategies to Conquer Mergers and Acquisitions
Finally, M&A can provide an avenue for an exit or a liquidity event for business owners or investors. Business founders or owners who want to retire or venture into other business opportunities can sell their company and exit the market.
Selling to a larger organization can provide not only a profitable exit for them, but it can also help ensure that their company and employees will continue on and grow. Additionally, M&A can provide liquidity events for investors and shareholders, unlocking value and providing a return on investment.
Small and medium-sized businesses can significantly benefit from mergers and acquisitions as a powerful growth strategy, just as large businesses can. And while all M&A activity does carry risks that need to be carefully considered, there are significant benefits.
It can be complex, but the right partner can help you navigate the process. By adopting the right approach and strategy, M&A can be a game-changing opportunity for any size company to take their business to the next level.
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Marius Silvasan
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The stock of Mediterranean-style fast-casual restaurant chain Cava Group Inc. soared 11% Monday, after analysts initiated coverage on the stock which made its debut on public markets in mid-June with a flurry of buy ratings.
At least four of the banks that were underwriters on the initial public offering — JP Morgan, Stifel, William Blair and Jefferies — assigned the stock a buy rating or the equivalent.
FactSet shows one bank has a hold rating but it’s a restricted listing so it’s not clear who it’s from.
The company
CAVA,
raised $317 million in its initial public offering, which priced above its proposed range at $22 a share and immediately rallied on opening. The company issued 14.4 million shares at a valuation of $2.45 billion. The stock was last trading at $43.83.
The company is not profitable and has high cash burn and just $23 million in cash and cash equivalents on its balance sheet, according to its IPO filing documents.
But analysts were unfazed, with William Blair analysts calling it a clear leader in a fast-growing category with proven geographic appeal.
“CAVA has hit upon a winning formula with its customizable menu of bowls and pitas featuring bold Mediterranean flavors that can fit in any dietary preference,” wrote analysts led by Sharon Zackfia.
“CAVA’s customer appeal is evident in average unit volumes (AUVs) of roughly $2.5 million and a 44% five-year revenue CAGR through 2022.”
The company accelerated its growth with the 2018 acquisition of Zoës Kitchen, “which provided immediate access to attractive real estate in new markets while enabling capital-efficient densification in top-tier trade areas (Zoës conversions roughly half the cost of a typical greenfield CAVA),” they wrote.
That has set the company up to end 2023 with roughly triple the number of locations as it had in 2020.
William Blair estimates that there’s room for at least 1,200 domestic Cava restaurants based on the population per restaurant already achieved in Virginia, where it’s still adding locations.
That supports management’s target of 1,000-plus locations by 2032.
“We also see the potential for digital drive-thrus to further lengthen CAVA’s growth runway while lifting AUVs (and potentially returns), with about one-third of this year’s new units having drive-thrus, ramping up to about half in 2024 (versus roughly 20 drive-thrus today),” they wrote. William Blair initiated coverage with an outperform rating.
JP Morgan launched coverage with an overweight rating and a December 2024 $45 stock price target. Analysts cheered the entrepreneurial sprit of Founder and CEO Brett Schulman with help from Chairman Ron Shaich, the founder of Panera Bread.
“In-store design/operational procedures and back-end support for the network allows CAVA to be efficient, safe and consistent as the brand leverages these systems for its goal national brand penetration,” they wrote in a note to clients.
Mediterranean cuisine covers many types of food and occasions, so the end-market is large, topping out at more than $1 trillion in U.S. sales.
While bowl builds priced at $10.95 to $16.95 will likely limit a high frequency of lower-income consumers, “we believe the brand has an enduring appeal to a very broad customer base for at least occasional usage.”
And suburbs are 82% of the site mix and are expected to remain a key location base, they added.
Stifel and Jefferies analysts initiated coverage with a buy rating and $48 price target. Stifel analysts led by Chris O’Cull also cheered the wide appeal of the food and compelling unit-level returns and highlighted the company’s healthy balance sheet.
“The company is in strong financial condition with no funded debt and roughly $340M in cash on hand following the company’s IPO,” they wrote in a note to clients. “We project the company’s average quarterly cash balance will remain above $200M with no funded debt for the foreseeable future. We project positive annual free cash flow starting in 2026.”
Still, not everyone is convinced the company is a buy. David Trainer, chief executive of New Constructs, an independent equity research firm that uses machine learning and natural-language processing to parse corporate filings and model economic earnings, published a series of critical reports before the IPO.
Trainer questioned Cava’s ability to reach profitability and its high valuation. He even compared it to WeWork
WE,
the infamous startup created by Israeli entrepreneur Adam Neumann, that at its peak was valued at $47 billion, but is now trading at just 26 cents a share, or a market cap of $521 million.
The Renaissance IPO ETF
IPO,
has gained 32% in the year to date, while the S&P 500
SPX,
has gained 15%.
For more, see: Fast-casual restaurant chain Cava Group’s IPO documents raise some red flags: analyst
Read now: Cava Group CFO is confident restaurant chain will be profitable—but she won’t say when
Related: 5 things to know about the fast-casual Mediterranean restaurant chain Cava
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Shares of Mullen Automotive Inc. rocketed on massive volume for a second-straight day, after the electric vehicle maker announced plans to buy back a chunk of its shares.
The company
MULN,
said it believes its stock is “significantly undervalued,” given its current cash position of about $235 million. Therefore, the board of directors have authorized the repurchase of up to $25 million worth of its outstanding shares through the end of this year.
The buyback amount represents 17.1% of Mullen’s current market capitalization of about $145.8 million.
“We are initiating this buyback program as an attractive opportunity to deploy capital and return value to our shareholders,” said Chief Executive Officer David Michery.
The stock soared as much as 88.2% intraday, before paring gains to be up 32.8% in afternoon trading. Trading volume swelled to an already record 1.78 billion shares, compared with the full-day average over the past 30 days of about 205.0 million shares.
On Wednesday, the stock blasted 69.4% higher, the biggest one-day gain since it ran up 145.6% on Feb. 28, 2022, on then-record volume of 1.39 billion shares. That followed the company’s announcement that it retained a law firm to combat illegal naked short selling.
A short sale is a way for investors to bet that prices will fall. The short seller must pay to borrow stock owned by another investor so they can sell it with the hope of buying the stock back at a lower price. If the investor who originally owned the stock sells their stock, the borrower must cover their short so they can return the stock.
“Naked” short selling refers to the illegal act of shorting a stock without borrowing it first. While that is often blamed for what companies believe are unwarranted declines in their stock, market structure experts have often refuted those claims.
Read: Short sellers are not evil, but they are misunderstood.
Before the stock’s two-day bounce, it had closed Monday at a record low of 10.1 cents, even after the company reported last week that it recorded revenue for the first time, and that it received additional financing that put it in the “best financial position” in its history.
Mullen had said on Wednesday that it “believes it may have been” targeted by naked short sellers, and therefore decided to investigate any “potential wrongdoing.”
The latest exchange data showed that the percent of Mullen’s public float, or shares freely available to trade, that have been shorted was 16.2%, according to FactSet data. That’s less than half what the percentage was a month ago.
In comparison, fellow “meme” stock AMC Entertainment Holdings Inc.
AMC,
has 23.6% of its float shorted and 20.8% of GameStop Corp.’s
GME,
float is shorted.
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Brookfield Reinsurance Ltd.
BNRE,
has agreed to acquire the shares of American Equity Investment Life Holding Co.
AEL,
or AEL, it does not already own in a cash-and-stock deal valued at $4.3 billion. Under the terms of the deal, AEL shareholders will receive $55 per AEL share, consisting of $38.83 in cash and 0.49797 of a Brookfield Asset Management Ltd.
BAM,
class A limited voting share with a value of $16.15, subject to adjustment. The price is equal to a 35% premium over AEL’s undisturbed closing share price on June 23, and a 42% premium to AEL’s 90-day volume-weighted average price as of that date. “This transaction represents an important step in the continued growth of our insurance business, further diversifying, and scaling, our insurance capabilities, and is a direct result of the partnership we have developed with AEL since our initial investment in 2020,” said Brookfield Reinsurance CEO Sachin Shah in a statement. The deal is expected to close in the first half and will not be dilutive to BAM, BN or Brookfield Reinsurance. Once ti closes, AEL shares will be delisted from the NYSE. AEL’s stock rose 2.4% premarket.
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The fate of
Microsoft
$69 billion purchase of
Activision
Blizzard will finally be known in the coming weeks—and investors may want to consider taking profits on the videogame maker’s stock before then.
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Chip maker
Intel
offered positive news on its foundry business Wednesday as it continues to build out new facilities to expand the custom chip-making service. Investors sold the stock anyway.
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