July 2016 Issue
Global M&A activity declined in the first quarter of 2016 compared with the previous year, according to a new report from Mergermarket.
The firm’s ‘Monthly M&A Insider Report’ noted that Q1 2016 saw a total of 3474 deals worth an aggregate $605.5bn. This marks a considerable downward swing from the 4126 deals announced during the same period last year, worth a combined $785.5bn. However, despite the decrease in deal activity, the top performing sector, industrial and chemicals, saw a 71 percent increase in deal value this year. In Q1 2016, the industry yielded 655 deals totalling $145.1bn.
Arguably, there was a degree of inevitability about the decline seen in deal activity in the first quarter of this year, given the runaway success of 2015. As Mergermarket suggests, Q1 2016 may be seen as the market rebalancing itself. The final three quarters of 2015 saw total deal value exceed $1 trillion, and the continuation of that level of activity was always going to be unlikely.
In total, the first quarter recorded a 22.9 percent decline on the same period in 2015 and saw the lowest first quarter value in two years.
One of the most notable trends through the first quarter of 2016 was the burgeoning influence of Chinese players in the global M&A market. Chinese acquirers were fairly prolific, with outbound activity accounting for 26.3 percent of total cross-border deals, at a total value of $82.1bn – already a record annual total for Chinese acquirers. Chinese firms have emerged in recent years as genuine players in the outbound M&A market. Historically, the US has been the pre-eminent power in outbound deals, but the slowing of the Chinese economy has seen local firms expand their horizons abroad.
Mergermarket notes that Q1 2016 saw the US’ total outbound value fall 5.7 percent from Q1 2015, whereas China’s outbound value over the same period has grown a remarkable 348.8 percent. China announced 85 transactions worth $82.1bn, against 241 transactions worth $47.5bn for the US.
In North America, the pharma, medical & biotech industry was the dominant sector in Q1, with 125 deals worth $56.2bn. Accordingly, the industry accounted for 21.8 percent of all North American deal activity. However, in general the first quarter of 2016 was a significantly depressed period compared with the previous year. Uncertainty in European and Asian economies were cited as key to the drop in activity, along with changes to the US tax code.
Although mega mergers have, over the last two years or so, emerged once again as a key feature of the global M&A market, the first three months of 2016 saw a notable decrease in top-end transactions. Mega deals dropped from 13 worth $243.1bn in Q1 2015 to eight deals valued at $158.5bn this year. The average deal size recorded in Q1 2016 also fell markedly, from $442.7bn in any quarter of 2015 down to $367m. Mergermarket suggests a number of different reasons for the decline in mega merger deal activity, including the fact that firms carrying out larger deals are facing increased scrutiny and a growing political backlash. This is particularly telling in terms of cross-border transactions, which have benefitted significantly from the popularity of tax inversions.
Following significant political and regulatory scrutiny, the days of US firms attempting to benefit from tax loopholes, previously allowing them to relocate to more favourable tax domiciles in Europe, appear to be at an end. The introduction of regulations by the US Department of Treasury has already had an impact on inversions. US-based Pfizer and Ireland-based Allergan’s $183.7bn merger was cancelled in the immediate aftermath of the Treasury’s announcement. The furore surrounding the recently released Panama Papers will also likely impact upon dealmaking as firms hope to avoid the glare of regulatory scrutiny.
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Richard Summerfield