Are Mega-Mergers Back?

0:01Travis Hoium:It's Monday, stocks are up, and Motley Fool Hidden Gems Investing starts now.

0:09Travis Hoium:Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium, joined today by Lou Whiteman and Rachel Warren. We got a couple of new guests and a new host today for the Monday show, but we will all three be back on Wednesday as well. One of the big news items over the weekend as we prepare for a very busy earnings week, Rachel, is that AstraZeneca and Bristol Myers Squibb have apparently at least talked about a merger. This would be another. We talked about mergers and acquisitions on the show recently and that this administration may be a little bit more amicable to some of these deals. But this could be a huge deal in the pharmaceutical industry.

0:49Travis Hoium:So what do we need to know? Yeah, this is an interesting one. And a lot of analysts are perplexed by this news. And the reason for that is kind of multifold. But one is that AstraZeneca already has one of the strongest organic growth profiles in all of pharma. I mean, this is a company that's on track to hit$80 billion in annual sales by 2030. So if there's one company that doesn't necessarily need to go out and participate in a huge merger, it would be AstraZeneca. I mean, this would essentially force them to absorb Bristol-Myers Squibb's looming patent cliff on some really key legacy assets.

1:27I mean, Bristol-Myers is staring down some brutal generic competition for some of its top-selling blockbusters, Eliquis being one of those well-known ones. And so I think there's a justifiable fear that taking on this merger, acquiring these drugs so close to their patent cliff, that could really dilute AstraZeneca's oncology-driven growth business. But there's other things to consider, too. There's some potential antitrust roadblocks that would come up. I mean, both AstraZeneca and Bristol-Myers Squibb are powerhouses in the world of cancer care. And so you'd probably be seeing some red flags triggered for, you know, the US FTC, European regulators as well.

2:06Another thing to note, maybe this is coming up for some reason because AstraZeneca is wanting to expand its exposure within the US. Bristol-Myers drives about 69 % of its revenue from the US compared to AstraZeneca's 42%. A couple final notes I'll make here. We have seen throughout the history of pharmaceutical mega mergers, they frequently lead to a destruction of shareholder value. There is this concern that if this deal actually went through, we could see some of the other big pharma companies feel that they need to engage in a wave of defensive mega mergers. One other thing to note, if you're looking at this as a potential merger, a straight cash and debt buyout is essentially impossible.

2:47Neither company has the independent balance sheet firepower to pull it off. You know, Bristol Myers has a deal capacity of around 32 billion, AstraZeneca around 37 billion. So a lot of unanswered questions still.

3:00Travis Hoium:Lou, besides this potentially being the worst named law firm in the world, what stuck out to you?

3:06Lou Whiteman:So I'll say I think the truism that, you know, mergers are terrible, that most mergers fail is overstated. I am a big proponent of smart M &A. I don't think this is smart M &A. This feels like size for the sake of size. Yes, technically, Zeneca would get more exposure to the U.S., but like Rachel said, it's already more than half a sale. So I think that is weak tea in terms of justification. The issue here is, is that I really think this deal might be not in the public good. There is so much product overlap here. The two companies have very similar therapeutic interests, as they say. They compete in areas like cancer immunotherapy.

3:44Lou Whiteman:They have pipelines that are chasing the same targets. Look, if this happens, inevitably some promising molecule that right now is being championed by a company will get shelved or it won't get as much attention because there are other molecules in the portfolio that are doing something similar that either management likes better or something like that. I have a theory on why we're hearing about this, and we can get into that if you want. But I don't think this is going to... All right. So look, there is a sense that the current administration is merger friendly. I don't know if the reality has really shown that.

4:22Lou Whiteman:I mean, I think it's a mixed case at best, but the perception matters. And I think we are going to see a lot of ambitious swings at the fences and M &A in the next six or nine months, because we are coming up on the deadline that they are going to have to start the process if they want to get this done ahead of the 28-28 election. Again, I'm not trying to make political commentary. I don't know if they will get done, but I do think that perception rules here. And the sense is, is that now is when the getting is good. If you want this administration to review your deal, you have to, you better, you got to step on.

4:58Yeah.

4:59Travis Hoium:We'll be really interested to see what management teams do with relation to M &A, because it does seem like, you know, it's at least much easier today than it was a few years ago. You still have to deal with potential state lawsuits. That's what we're seeing with the Paramount and Warner Brothers Discovery deal. So that one did get delayed, didn't get pushed through. So a lot of things to consider. But this is one that I'm going to be keeping an eye on because mergers and acquisitions in the pharma industry. Yeah, I'd like to have more competition for not only products on the consumer side, but also on the research side as well.

5:31Travis Hoium:When we come back, we're going to talk about the latest on interest rates. You're listening to Motley Fool, Hidden Gems, Investor.

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6:39Travis Hoium:Welcome back to Motley Fool and Gems Investing. One of the big changes in 2026 is the expectations for interest rates. Lou, we came into the year with the market expecting a couple of rate cuts from the Federal Reserve. Now, mid-year, we're expecting maybe a couple of rate hikes. That is extended into bond markets as well. We don't talk a lot about bond markets, but this does drive the stock market. It drives how much it costs companies to borrow money. It drives the discount rate that investors are using to value stocks. So it may make it a little less attractive to overpay for companies when you have other options with your money.

7:14Travis Hoium:A couple of notable things happening in the bond market, at least for US treasuries, that is the interest rate for the 10 year is at a high that we haven't seen since 2007 or very near that high since 2007. If you go back to the 30 year, we're at a high that we haven't seen since 2007, maybe even 2004, depending on where the number is at at the moment. This seems like a big change for a lot of investors who have never seen rates this high.

7:45Lou Whiteman:Never seen rates this high. Look, rates are the least of my worries here. The rates are within the normal bound of the last 50 years. Good, healthy businesses can operate within these rates. So I think the actual, where the rate is today is the overstated part of the story. The understated and the part that is keeping me up at night is credibility. And let's talk about credibility, what we mean here. For decades now, back to the Greenspan Fed, there has been this belief in the market, maybe a mistaken belief, but a belief in the market that Fed is Captain America, that the Fed would step in and save the day at the first sign of trouble.

8:21Lou Whiteman:That belief has now been shaken. And OK, I know this is counterintuitive, but you talked about how the rates have spiked up since last week's Fed meeting. Last week, the Fed held rates steady. They did not raise rates, yet rates are hiking. I genuinely believe if the Fed had raised rates by 25 basis point last week, mortgages and long term rates, they'd be flat right now. They might have actually fallen on that. And the reason is, is because credibility matters more than the actual today's rate. All right. The Fed has an incredibly limited toolkit. It always has. Its superpower is talking a big game.

8:58Lou Whiteman:That is what gives it power. The aura is gone. The credibility is gone. What does this mean for investors? Like I say, I think the market, I think healthy companies can handle these rates, but the Fed put, if that is gone, credibility is shaken. If nothing else, it'll mean more volatility. It means there's one less thing and one less insurance policy out there.

9:21Travis Hoium:Yeah. Rachel, the other detail to bring in, if you don't follow interest rates closely, the rate that we talk about typically with the Fed is a very short-term rate. It's basically a zero to three-month rate. That's what they can control. They do not control the 10-year rate, which is somewhat something like a mortgage is going to be based on. So the change in the mortgage at the end of June, so a little over a month ago, was 4.37%. It is now almost a full percentage point higher at 4.69 % as we're recording. So this is a pretty big jump that the market, not just the Fed, the market is telling us that they're demanding more from their money.

10:00Yeah, I think the thing is that the bond market and the stock market are telling two very different stories about our economy right now. Now, you know, we're talking about how bond yields are surging to near 10-year and 20-year highs. Obviously, this is showing that the basic cost of borrowing money has gone up significantly, but we're still seeing stocks trade near record highs. I think a lot of investors are, you know, acting like these high interest rates don't matter. And I do think that there's a justifiable concern that a lot of the spending we're seeing by a few, you know, giant technology companies is maybe hiding a broader slowdown in the regular economy.

10:33We've got the big tech firms that are pouring billions into artificial intelligence and digital infrastructure, which, of course, can keep some of the indices higher than usual. And meanwhile, everyday consumers are facing severe pressures from these high borrowing costs. We're seeing the rising cost of U.S. debt insurance, which is up 21 percent this year. And I think that also shows the market is worried about some of these growing deficits. And, you know, Lou mentioned the Fed's decision last week. I mean, they've really stopped giving predictable clues about what they're going to do next under the new leader, Chair Kevin Warsh.

11:08And the central bank has intentionally cut back on forecasting its policy moves ahead of time. And so a lot of the roadmaps that Wall Street is used to and that tend to sort of compel financial markets to react suddenly to the new economic data have been somewhat muted. Now, the Fed voted to keep interest rates unchanged in its last meeting, but we saw that three regional Fed presidents strongly disagreed. They actually actively voted against the group because they wanted an immediate interest rate hike to cool down the economy. There is, you know, from the data that we have, about 61 to 68 percent belief that the Fed will pass two or more rate hikes before the end of the year.

11:44So I think that it really remains to be seen what kind of shifts will be coming through in the months ahead. But I do think we're seeing a continued divergence between the performance of the stock markets and the bond markets. Doesn't mean there aren't wonderful quality companies that can continue to succeed in these environments. I think Lou's absolutely right there. But it is something to bear in mind, regardless of the sector you tend to invest in.

12:06Lou Whiteman:The one thing I just caution on is like to reading or sweeping things into either of these things. I would push back a bit on the idea of the bond market and stock market are telling different stories about the economy. I don't think either is talking about the economy as a whole. I think the bond market is reacting to uncertainty on the long end. Your full faith and credit in the U.S. government is what gets you to give them money for 30 years. To the extent that that faith is full is going to affect your willingness, and that is what is affecting pricing. I don't think the 30 year is moving or the 20 year is moving on the outlook for the next six months of the economy.

12:45Lou Whiteman:Similarly, I think earnings are moving on the ability for companies to expand earnings or the market is moving on earnings. A lot of that is just tax and depreciation. I don't think either is really saying if the economy is healthy or not. I think they're just reacting to different stimuli, I guess.

13:05Travis Hoium:The one thing I'll add is a lot of the companies in this AI buildup that you guys mentioned is being fueled by debt. And as interest rates rise, those debt costs go up. So something for investors to keep an eye on because when it's not free money, you got to actually generate a return on that investment. When we come back, we're going to get to the items that are on our radar for this week. You're listening to Motley Fool Hidden Gems Investing.

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15:33Travis Hoium:Welcome back to Motley Fool Hidden Chims Investing. We do have a big earnings week ahead this week. So I wanted to get an idea of what's on everybody's radar. Rachel, what are you looking at this week? Yeah, there's a few companies I'm watching. I mean, I think we're going to be looking at some valuation tests for AI demand. You've got Palantir reporting this week. You've got Advanced Micro Devices, AMD, that's also reporting this week. You know, for AMD's part, they're projected to deliver a 47 % year-over-year revenue increase. So that's something to watch for. Obviously, SpaceX, which I'm sure Lou will want to touch on.

16:06I think investors are going to be, tracking whether cash flow from their satellite broadband operations can support their continued annualized expenditures on AI computing networks. A lot of interesting things to watch there. I'm watching consumer spending metrics. You've got the fast food operators, but you've got Walt Disney that's reporting this week. You've got Berkshire Hathaway. We had some early reports today from the likes of Marriott and Tyson Foods that have set a bit of a cautious tone. We're seeing a bit of a decline in international travel performance, some volatile commodity pricing.

16:37So it'll be interesting to see what these companies have to say.

16:40Lou Whiteman:Luke? So if we hadn't already just talked about it, I do think, look, what's going on in the long end of the Ray curve, that is not market defining for this week, but that could speak to how the next few years go. So I don't sleep on that story. I don't trade on that story, but don't sleep on it. But Rachel mentioned SpaceX. I'm not really interested in the current quarter's numbers. I don't think the numbers are going to really tell us much. But first, what is the tone? That Tesla call was the most somber I've heard Musk. You know, was that a Tesla thing or was that, you know, I'm guessing it was, but I'm really curious about that.

17:13Lou Whiteman:But also, let's be honest here. SpaceX still has a lot of work to do to explain to the market what they are and what they want to be in the near term. The S1 listed a total addressable market about the size of U.S. gross domestic product. That was fine for a marketing document. But I do think we talk about lockup expirations. We talk about index inclusions. A lot of what is moving or pressuring SpaceX stock is that they have not yet really articulated the near term vision. Musk has always been very good at the story side of it. This is his chance to actually create a narrative, tell a story. And if he if he can succeed, I think that would be very good for the stock, even with the lockouts coming up.

17:54Travis Hoium:Yeah, it's still interesting that this company is basically driven by its neocloud business, renting GPUs to the near term results. the numbers with dollar cents almost don't matter right now. Yeah, yeah, because that's not necessarily going to be their business forever until they get those data centers out into space, but we'll see. I just wanted to mention that I'm looking at Uber. This is one of those companies that I think is extremely overlooked. It's almost boring for a company to just steadily grow 20 % or so a year, but that's what they've been doing. Can they keep compounding? Is there a real threat from something like Waymo?

18:29Travis Hoium:Because it seems like that partnership is kind of on the fritz, and we've talked about that a bit on the show. But that is a company that I think could show where people are actually spending their money and where's their value in the market. But we will see more to come from Motley Fool Hidden Gems Investing. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows The Motley Fool's editorial standards and is not approved by advertisers.

18:58Travis Hoium:Advertisements are sponsored content and provided for informational purposes only. to see our full advertising disclosure, please check out our show notes. For Lou Whiteman, Rachel Warren, and Dan Boyd behind the glass, I'm Travis Hoyam. Thanks for listening. We'll see you here tomorrow.