November 2015 Issue
For mergers and acquisitions (M&A) professionals, 2015 has been a bumper year. The first half of the year in particular was punctuated by a series of high profile mega deals concluded across a number of sectors, most notably in communications, pharmaceuticals and technology. Key deals such as the $55bn Charter-Time Warner deal, the near $50bn tie up between Heinz and Kraft and the $31bn merger between Avago Tech and Broadcom have helped to generate considerable interest in M&A again this year. Indeed, according to data from Thomson Reuters, in the US 4654 M&A deals worth around $875bn were concluded in the first five months of the year alone.
Given the renewed interest in the M&A space, dealmaking activity is on track for a record year in 2015. Cheap financing and robust, sensible corporate growth plans have helped to drive activity forward. As such, we may see M&A resurgence spill over into a third year. With Europe, the Middle East, Africa and the US all seeing considerable activity, M&A is firmly back on the corporate agenda, following years of stagnation in the post financial crisis era. Hopes are high that M&A activity may continue to blossom for years to come, although some analysts are urging caution. “The rest of the year is likely to remain very busy for dealmakers as corporates continue to use external growth to seek growth and private equity firms make the most of the favourable financing environment and high exit multiples. This could lead M&A to new record highs,” says Beranger Guille, EMEA editor at Mergermarket. “But we’re not far from the peak of the cycle and these favourable dealmaking conditions may not last forever. This could accelerate activity in the short term but the 2016 deal flow will as ever be impacted by the outlook for equity markets, which are bound to see further volatility and uncertainty as the year unfolds.”
Gathering momentum
As impressive as 2015’s track record has been for frequent, big ticket M&A deals, much of the dealmaking momentum was gathered last year. 2014 saw global M&A activity in excess of $3.5 trillion, with an increase in overall deal activity of 47 percent year on year. Deals such as AT&T’s $55bn acquisition of DirecTV Inc and Activas PLC’s $66bn merger with Allergan Inc helped drive global activity, solidifying the burgeoning appetite for dealmaking which began to emerge in 2014. Large value deals, at $5bn or more, were a key feature of last year’s M&A landscape, with 95 announced transactions.
The enthusiasm for large and mega deals has not diminished in 2015, and if anything has actually increased. By the end of August 2015, companies around the world had spent $3.1 trillion on acquisitions, and though the number of deals had actually declined at that point year on year, the value of those deals has exploded. In the first half of the year, there were 54 announced deals above the $5bn mark. According to Dealogic, the total value of 2015’s M&A spend could exceed $4.7 trillion, taking it above the pre-crisis high of $4.6 trillion recorded in 2007. Much of this activity has been spurred on by resurgent mega deals. Hutchison Whampoa’s $15.9bn acquisition of British mobile network O2, the $15bn purchase of Cameron by Schlumberger, Heinz’s $55bn deal for Kraft Foods, and a litany of big ticket pharma deals have all helped to push the average purchase price northward.
“Cheap financing and robust, sensible corporate growth plans have helped to drive activity forward.”
2014 provided this year with something of a kick-start. Dealmakers, particularly in the US, have been encouraged by a number of deal driving factors. Many acquirers have made hay while the sun shined. Driven by record low interest rates, record stock prices, rebounding employment figures, and an abundance of dry power, M&A professionals have seen, and taken, a multitude of opportunities over the last 18 months. Appreciation of the dollar, growing shareholder pressure and alarming volatility in the commodities and oil markets, have also helped to drive activity.
M&A has also been influenced by recent geopolitical and economic developments across the globe. While there is still considerable appetite for M&A activity, the slowdown of China’s previously runaway economy and the significant depreciation of the yuan have given cause for many commentators and analysts to pause and take stock of the future of M&A globally. The delicate state of the global economy may, in the long run, have a serious effect on M&A activity; but in the short term, deals keep coming.
Turmoil in the Chinese equity markets during August had a seismic effect on the global market, sparking fears of a renewed global financial crisis. However, the effects were not significant enough to curtail M&A activity. The considerable deal pipeline seen over the last two years continued to generate significant transactions. On 8 September alone, $40bn worth of new transactions were announced, including a $12bn infrastructure deal by Hong Kong businessman Li Ka-shing, Woodside Petroleum’s $8bn offer for rival firm Oil Search, insurance firm Mitsui Sumitomo’s $5.3bn bid for Amlin plc and Blackstone’s $6bn acquisition of Strategic Hotels. In the US, more than $300bn worth of deals were announced in August, making it the busiest August in US history.
In the long term, the potential for further market volatility may dilute appetites for additional M&A activity. However, for some companies the opposite may be true. Some sellers, under pressure from shareholders to protect value, may be inclined to pursue deals. By merging with industry rivals, sellers can create a more stable and profitable company, so consolidation will remain a strong and viable choice for many, particularly firms in the pharma and communications spaces.
Targets
Much of the M&A activity recorded in 2015 to date has been driven by US firms, as well as acquirers from Asia. Europe, and emerging Europe in particular, has proven to be popular with acquiring companies. From US businesses looking to ‘invert’ and redomicile in countries with a lower corporate tax rate, to Japanese and Chinese organisations looking for overseas opportunities, European-targeted M&A has blossomed in 2015.
In the first half of the year, six out of the top 10 deals in Europe were orchestrated by non-European acquirers. The impressive growth figures offered by countries in Eastern and Central Europe have been a catalyst for activity, according to Helen Rodwell, Head of Corporate in CEE and managing partner of CMS Cameron McKenna in the Czech Republic. “From what I can see in Central and Eastern Europe, the interest from Japanese, Korean and Chinese acquirers is again increasing,” she says. “The region is still target-rich and is showing promising GDP growth figures. It is, however, not yet showing the high multiples that are seen in the US, making it an attractive place to invest. By acquiring European companies, Asian buyers get access to new technologies and new clients or markets which would be hard to acquire otherwise.”
With the European Commission recently upgrading its growth forecasts for Europe, in light of the ongoing weakness of oil prices, and the weakening of the euro, it is likely that Europe will remain a key target. However, renewed efforts from US lawmakers to curtail inversion deals may have a negative impact.
The recent slowdown of the Chinese economy has seen Chinese companies emerge as key figures in cross-border M&A, seeking deals in Europe and the US. Chinese businesses are looking to diversify their offerings, while younger, ambitious firms are hoping to differentiate themselves from more traditional domestic players, and are targeting overseas M&A to achieve their goal. By acquiring European and US based organisations, there is a belief among Chinese firms that they can help their targets grow and capture business in China itself, as well as gaining the important brand cachet and experience which can only be derived from operating in an established economy. Mr Guille points out that the first half of the year was a notable one for acquiring Asian firms. “Asia saw the highest amount of outbound activity, at $62.2bn, on Mergermarket record,” he says. “Europe has proved a happy hunting ground for Asian companies, with 89 deals worth $37.3bn. The UK has proved especially attractive.”
Transactions such as the CK-Hutchison Group’s expansion into Europe and North America can be seen as part of this wider move by Asian conglomerates, according to Mr Guille. He adds that the growing trend is also underpinned by Chinese consumer or technology companies looking for prestigious western brands and cutting edge technologies.
Given that many Chinese acquirers are willing to pay top prices for assets overseas, Europe has proven popular. Hopes are high for a recovery of the European economy, and corporate valuations are lower in Europe than elsewhere. Moreover, a lot of European businesses have been open to acquisition since the onset of the financial crisis. The abundance of interesting assets in the diverse European region has also been a beacon to acquiring companies from Asia and the US.
Japanese acquirers have been keen to enter the fray. Much like their Chinese counterparts, Japanese companies are increasingly active in response to a slowing domestic market and limited growth opportunities at home. In August, Japan’s largest media company, Nikkei, agreed a deal to acquire the Financial Times for $1.3bn. Overall, Japanese companies have completed 25 acquisitions of British targets in 2015, spending a record $11bn in the process.
Healthcare has been the most targeted industry in 2015 to date, carrying over the impetus from the second half of 2014. To the end of July 2015, healthcare generated activity worth $36.38bn, though the insurance space and the oil & gas industry also saw significant activity.
For Ms Rodwell, deal activity should increase across a wide variety of industries. “It seems to be busy across the board but there are definitely a few sectors that stand out,” she says. “We still see rationalisation in the financial sector. Global banks and insurance companies are reconsidering their presence in smaller markets or their activities in certain market segments, driven by regulatory developments as well as meeting EU commitments related to state aid during the financial crisis. Activity in the sector is set to continue for the next two years or so. Consumer products seems to be making a strong comeback with both strategic and private equity investors looking for targets worldwide. With consumer spending on the rise, I expect activity in this sector to continue. Post-Fukushima strategic reconsiderations and low oil prices are driving large energy players to dispose of ‘less desired’ assets, making it one of the sectors to watch as well. In the technology, media & telecoms sector, we see large mergers between global players as well as smaller acquisitions by market leaders to obtain new technologies,” she adds.
The global technology space has seen considerable activity in the first half of the year. To the end of August, global M&A volumes in the tech sector reached $392bn, double the year on year total of $196bn recorded in 2014. Some 5623 deals in the sector were completed, with 60 percent of those located in the US. China and the UK were the next two most targeted locations, witnessing 22 percent and 4.2 percent of activity respectively.
Deals involving UK firms as either acquirer or target crossed the $400bn mark in early September. News that gambling firms PaddyPower and Betfair had agreed a £6bn merger, private equity group Cinven had agreed a £2.3bn sale of British pharmaceutical firm AMCo to Canadian rival Conordia, and Amlin was sold to Japan’s Mitsui Sumitomo for £3.5bn, hit the markets on the same day.
Telecoms also enjoyed a remarkable H1 with M&A volumes climbing 8 percent year on year to $247.4bn, up from $229.6bn. This represents the highest year to date total since 20006. Six of the deals completed in the telecoms space were ‘mega deals’, which combined for a total of $141.9bn.
A golden age?
Given the value and volume of M&A transactions over the last two years, one could argue that we are entering a golden age of acquisition activity – though there are some caveats to consider. The volatility of the European economy could still disrupt dealmaking, as could instability in the Middle East and Russia. Furthermore, the economic slowdown in China could have a detrimental effect. “There seems to be a healthy pipeline so it is likely that we will maintain the current levels of activity for the near future. Geopolitical uncertainty and economic slowdowns – such as currently in China – are not yet causing shockwaves in the M&A market, however ripples are being felt in specific sectors such as raw materials. Current developments make it hard to predict the level of activity beyond the immediate future,” says Ms Rodwell.
Without a crystal ball, it is impossible to predict how M&A activity may be affected by global economic uncertainty. Financing M&A has been incredibly cheap in the past few years and corporates have made the most of these favourable funding conditions. But the potential for interest rates to rise in the future would impact dealmaking activity. Nevertheless, it is encouraging that activity has continued in earnest, despite a number of challenges. Should interest rates remain low, the abundance of cash on corporate balance sheets makes it conceivable that the M&A revival could continue into 2016 and beyond.
© Financier Worldwide
BY
Richard Summerfield