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Merger Mania: How Mergers and Acquisitions Can Transform Industries in 2018

m&a thumbnailMergers and acquisitions (M&As) are extremely important for companies looking to expand their footprints or enter new markets. For example, Japan’s SoftBank Group acquired US-based Sprint Corporation in 2013, in an effort to enter the US Wireless Telecommunications Carriers industry. Meanwhile, the 2017 merger between Dow Chemical and DuPont, two major chemical producers, created the domestic chemical sector’s largest company. However, M&A activity can also upend entire industries. A slew of mergers over the past decade in the Domestic Airlines industry has led to extreme consolidation, with the four largest players generating more than three-quarters of industry revenue. Since 2017 was a significant year for M&A activity, 2018 may bring big changes to several industries. Below, IBISWorld takes a look at the Walt Disney Company’s acquisition of 21st Century Fox, CVS Health’s acquisition of Aetna Inc. and the potential deal between AT&T and Time Warner, and how these deals may affect the companies’ respective industries.

The Walt Disney Company and 21st Century Fox  

The Walt Disney Company’s (Disney) recent acquisition of 21st Century Fox (Fox) was one of the largest deals in 2017, totaling $52.4 billion. The acquisition, which is pending approval from the US Department of Justice, has the potential to make Disney even more popular in the entertainment sector. In its most recent earnings call in November, Disney announced that it’s developing a series of original programs and shows that will coincide with its upcoming video streaming service. This move has the potential to completely upend the relatively new streaming services market, which is currently dominated by Netflix and Amazon. Netflix, in particular, has much at stake with this move. Disney not only announced it will pull all of its movies from Netflix, but, through the Fox acquisition, the company now owns a majority stake in Hulu—a key Netflix competitor.

This acquisition puts Disney in a position to control the entire life cycle of a movie or show. The company has the production capability to produce a high-quality movie (including Fox’s film and TV studios), then deliver it to audiences at home via a Disney-owned streaming service. Disney also owns some of the most famous theme parks worldwide, including Disney World and Disney Land, which could be outfitted to portray consumer’s favorite movies or shows. Furthermore, Disney’s publishing division would be able to release exclusive content and books to consumers who are looking for a literary copy of their favorite works. Disney has effectively become completely vertically integrated, offering consumers products and services within the entertainment sector at every possible level. Consequently, this acquisition is expected to affect the entire makeup of the entertainment sector. The Movie and Video Production industry, a monstrous industry that is expected to grow at an annualized rate of 2.0% to $47.9 billion over the five years to 2022, will be one of the most affected industries within the entertainment sector as two of its largest players consolidate their operations.

CVS Health and Aetna Inc.

The proposed merger of CVS Health (CVS) and Aetna Inc. (Aetna) marks another phase of transformation in the US healthcare sector and poses to upend the way people receive medical care. Given previous failed attempts at horizontal mergers, such as the failed Aetna-Humana deal in 2016, the deal may set the standard for future vertical integration and consolidation in the healthcare sector. CVS is a major player the Pharmacies and Drug Stores industry, while Aetna is a diversified healthcare benefits company serving 46.0 million Americans in the Health and Medical Insurance industry. The deal has been approved by shareholders and is currently awaiting regulatory approval.

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The CVS-Aetna deal is valued at $69.0 billion and aims to transform the delivery of healthcare services in the United States. In addition to making healthcare more accessible and convenient, the companies argue that the deal could redirect patients from hospitals to urgent care and retail pharmacy clinics, reducing costs and improving the companies’ competitive positioning to negotiate prescription drug costs. Currently, CVS is the largest US pharmacy, operating more than 9,700 retail pharmacy locations and offering comprehensive healthcare services through its 1,132 MinuteClinic walk-in locations, which staff nurse practitioners and physician assistants. As a result, the deal could significantly bolster CVS’ retail pharmacy earnings, while increasing the company’s bargaining power to reduce costs and premiums as the company competes with other rival integrated healthcare providers, such as UnitedHealth Group and Optum. While the deal still awaits approval by federal regulators, the projected merger demonstrates CVS’ desire to leave a larger footprint in the healthcare industry as a whole, with plans to offer customers more local care options and potentially full-service health centers in the near future.

Nevertheless, skeptics think that the plan is intended to strengthen CVS and Aetna’s competitive positioning in a tumultuous healthcare environment rather than benefit customers or reduce healthcare costs. Moreover, spreading vertical integration could mean that operators in the Pharmacy Benefit Management industry would make less sense as standalone companies in a healthcare system in flux, leaving Express Scripts as the last major standing pharmacy benefit management company in the United States. Other potential impacts of the deal include delaying online retail giant Amazon’s rumored entry into the pharmacy business. Should the CVS-Aetna deal be approved, the merger is likely to pave the way for more vertical integration in the healthcare sector.

AT&T Inc. and Time Warner Inc.

AT&T Inc.’s (AT&T) potential acquisition of Time Warner Inc. (Time Warner), which was announced in October 2016 at a price of $85.4 billion, is another mammoth deal that has the potential to completely reshape the structure and performance of industries in the telecommunications sector. However, the Justice Department filed suit to block the deal on November 20, 2017, on antitrust grounds. The proposed deal would bring together Time Warner’s content (including CNN, HBO, Warner Bros. and Turner Broadcasting System) under the same corporation as AT&T’s delivery services (internet services, DirecTV and other wireless transmission services), raising concerns of a potential monopoly in which AT&T remains a major telecommunications provider and also becomes a major provider of entertainment content.

The recent repeal of net neutrality regulations puts an increasing share of power in the hands of AT&T. The repeal, which allows providers to charge more for higher quality service or content, can enable AT&T to pour more resources into telecommunications infrastructure, benefiting the company at the expense of consumers. Given AT&T’s increased power because of the repeal of net neutrality, coupled with the potential of owning the entire supply chain from production to delivery and network capacity, AT&T could expand its reach in the streaming service market and compete with the likes of Netflix, Amazon and, perhaps, Disney.

Over the next five years, the Wireless Telecommunications Carriers industry, of which AT&T is a major player, is projected to increase at an annualized rate of 4.0% to $309.0 billion in 2022. The proposed acquisition of Time Warner would bolster AT&T’s bargaining power with competing industry giants, as well as power over consumers in its transmission of entertainment and services.

Last year’s M&A activity was historic. According to the Intercultural Mutual Assistance Association, which collects data on mergers and acquisitions, 2017 had the highest number of US deals since tracking began in 1985. Industry leaders have acquired or merged with major companies of other industries, setting up the potential for immense change in 2018. Disney’s deal with 21st Century Fox, which now makes Disney the majority owner of Hulu, puts the entertainment conglomerate in a position to legitimately compete with Netflix and Amazon. Meanwhile, CVS’ merger with Aetna has the potential to completely upend the healthcare industry, which itself is at a crossroads. Finally, should the AT&T-Time Warner deal go through, AT&T will not only control the means of distribution, but also the actual production of content. While involved companies are always affected by M&A deals, industries also have the potential to be transformed as a result of M&A activity.

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IBISWorld Report on M&A Activity_Jan18

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