June 2017 Issue
Despite economic and geopolitical upheaval, worldwide M&A activity boomed in the first three months of 2017, reaching over $777.7bn, a year on year increase of 12 percent, according to Thomson Reuters. Much of this growth has been driven by cross-border dealmaking, which recorded its strongest start to the year in a decade, up 7 percent in Q1 2017 compared with 2016.
On the strength of record levels of outbound M&A from acquirers based in the US and inbound M&A for European assets, cross-border M&A activity totalled $337.1bn during Q1, accounting for 43 percent of overall volume and the highest first quarter total since 2007. Chinese outbound M&A, however, totalled just $25.8bn, a 70 percent decline compared to last year’s record first quarter.
Many US acquirers looked overseas for targets. The biggest deal in Q1 was announced by US healthcare and consumer conglomerate Johnson & Johnson, which agreed to acquire Swiss biotechnology firm Actelion Ltd for around $30bn. A number of overseas acquirers completed deals for US targets in Q1, despite the ongoing economic and political uncertainty affecting the global economy. The most notable of these deals was announced in February as UK consumer products company Reckitt Benckiser Group Plc agreed to purchase US baby milk manufacturer Mead Johnson Nutrition Company for $17.9bn.
The boost in Q1 activity may have been a consequence of the uncertainty surrounding the election of president Trump in November. In non-election years, Q4 is often a prolific period for dealmaking, but a number of companies may have held off on any new deals in 2016, anticipating favourable changes, including tax reforms, under the Trump administration and thus pursued their targets in Q1 instead.
The value of global cross-border M&A transactions reached a 10-year high in Q1 2017, despite seeing a 10 percent decline in volume. According to Allen & Overy, the mining sector saw a 142 percent increase in deal values in the mining sector over Q1 2016. Rising commodity prices have increased confidence, and helped to drive activity. “The huge increase in deal values for Q1 may somewhat overstate the level of recovery in the sector. However, many now expect commodity prices to continue firming this year and next, and that will encourage banks and investors to get behind new projects and deals, further adding to the improving strength in the sector,” said Geoff Simpson, a partner at Allen & Overy.
Industries such as technology, consumer markets, and oil & gas all saw vigorous activity in Q1, according to PwC. Others saw deal volume slip from a year earlier. In the technology space, Intel’s $15.3bn acquisition of Mobileye, an Israeli developer of autonomous vehicle technology, was one of the largest and most high-profile announced deals. Outbound US-investment in the tech sector far outstripped inbound activity, comprising 77 percent of cross-border deal value.
In consumer industries, the proposed $49bn merger of British American Tobacco and Reynolds American Inc., which won regulatory approval in Japan in early April (the final market to approve the deal) accounted for around 54 percent of total deal volume in the space during the quarter. The consumer sector was the largest driver of deals in Q1, with 26 transactions valued at $82bn, according to Baker & McKenzie.
“Sectors to watch include technology, energy, infrastructure and defence” says Andrew J Sherman, a partner at Seyfarth Shaw LLP. “Finally, if certain policies which are deemed protectionist do not come to fruition or are defeated in Congress, such as was the case with healthcare reform, then the bark being louder than the bite could result in a significant uptick in cross-border transactions in the latter half of the year and well into 2018.”
The US-China paradigm
For some, cross-border activity should be viewed as a consequence of the optimism created by the Trump administration’s economic agenda. President Trump’s tax agenda has buoyed the stock market as well as the US dollar, making foreign acquisitions cheaper than some US targets. European targets have proved attractive with M&A activity in the region reaching $215.3bn in Q1, according to Thomson Reuters – a 16 percent increase on 2016 and the strongest start to a year since 2008. US acquirers took full advantage of market conditions, completing $114bn worth of deals during the period.
By contrast, however, US targets were less popular. Overseas acquisitions of US companies fell almost a quarter to $86.9bn in Q1, indicative, perhaps, of ongoing uncertainty among buyers following last November’s surprise election result.
Another deal driver is China. Chinese companies have been on a global buying spree over the past five years, with outbound M&A growing 33 percent per year, from $49bn in 2010 to $227bn in 2016. “Over the last few years, China has been a dealmaking superpower due to the growth and strength of its GDP and its overall economy,” says Mr Sherman. “To the extent that it perceives the US as a politically hostile ecosystem, then it is likely to turn its attention and focus to other regions, including a recovering Europe, an interesting Africa and a stabilising India.”
However, the pace set by Chinese acquirers last year was not matched in the early part of 2017. According to PwC, mainland Chinese firms announced 142 outbound acquisitions in Q1 2017, with a combined value of $21.2bn. The volume and value of those deals dropped 39 and 77 percent respectively, from record highs over the same period last year. The decline began in the final quarter of 2016 and is the result of increased regulatory scrutiny applied to Chinese firms by the government, including tougher requirements on authenticity and compliance of overseas investments. Also, uncertainties permeating the global economy have caused Chinese acquirers to put their chequebooks away, for the time being.
Any potential Chinese dealmaking resurgence will depend on a number of factors. One is the nature of the relationship between China and the US under Trump. While there is a degree of mutual dependence between the two nations, the relationship is often dysfunctional and disjointed – a situation which is not helped by the often bellicose rhetoric directed by Mr Trump and his administration toward China. Yet, as Mr Sherman explains, economic necessity on the Chinese domestic front may facilitate a change to Sino-American relations. “Pressure on the need to diversify abroad and to acquire more globally recognised brands, many of which reside in the US, will have been a major focus of the recent China/US trade and economic discussions. If the Trump administration were to offer an olive branch to China or seek more normalised political relations, expect to see a dramatic uptick in US-China transactions moving in both directions. We will have to see how the relationship between president Trump and president Xi develops following the Mar-a-Lago meeting, and whether we get trade wars, trade peace or perhaps something even more constructive,” he says.
The ‘America first’ focus of Mr Trump’s administration is set to pose questions for would-be acquirers of US assets, however. From a regulatory perspective, the Trump administration is expected to expand the remit of the Committee on Foreign Investment in the United States (CFIUS), which is tasked with performing national security review to determine whether a particular cross-border investment or transaction will affect US national security or critical infrastructure assets.
CFIUS, which includes the secretaries of the Treasury, Energy, Defence, State and Commerce departments, can impose changes to transactions or, in rare cases, recommend to the president that deals be blocked. The Committee has taken a keen interest in Chinese transactions in the US; the country was the leading source of investments reviewed by CFIUS from 2012 to 2014, accounting for almost a fifth.
Arguably, CFIUS is due for an overhaul. It was last subject to review over a decade ago, and is ill-equipped to cope with the emergence of cyber threats, hacking and the use of shell companies to hide ownership. The Trump administration is expected to create new powers for CFIUS, with an economic-benefits test one possible option. Others may include an insistence on trade quid pro quos to win deal approval and a process of ranking countries based on their perceived friendliness to the US. The new administration could even grant CFIUS permission to reopen previously cleared transactions. Revisions to CFIUS’ remit may transform cross-border dealmaking into the US. Indeed, Treasury Secretary Steven Mnuchin said during his confirmation hearing that the role of CFIUS is to protect American workers. This has never been a CFIUS priority in those terms, and indicates the protectionist economics advocated by president Trump.
To that end, the bankruptcy of Westinghouse Electric Co.’s nuclear business in the US will be a test case for Chinese infrastructure acquisitions in the US. Mr Trump is believed to be opposed to the purchase of Westinghouse by any of the three Chinese buyers interested in the company’s assets and intellectual property. Meanwhile, there are Chinese bids for three other US firm’s currently under review by CFIUS: Lattice Semiconductor Corp, MoneyGram International Inc. and Stillwater Mining Co., which may also provide an insight into the future of US-Chinese cross-border M&A.
Regardless of the administration’s view of Chinese dealmaking, Trump’s economic policy is creating uncertainty which is likely to impact deal making going forward. “There is some confusion in the marketplace between president Trump’s pro-business economic agenda and its positive impact on the capital markets thus far, however many sophisticated deal makers feel as though they are in the 11th hour of a party that likely ends at midnight and nobody knows whether that celebration will end abruptly or in an orderly fashion,” says Mr Sherman.
Activity in Europe
The continued weakness of the pound and the euro encouraged deals led by US and Asian acquirers in Q1, with a series of major transactions involving European groups announced in the quarter.
But cross-border dealmaking has never been easy and is arguably becoming harder. Increased protectionism is a growing feature in many developed nations. The European Commission is considering expanding its ability to block acquisitive approaches from a non-EU company or one of its EU-based surrogates if driven “just for the purpose of disposing its overcapacity”.
Since the start of 2017, non-European companies have announced deals with or bid on 43 European targets, according to PitchBook. Whether that number picks up will depend on a number of factors, both economic and political.
Brexit, economic uncertainty in southern European states such as Spain and Italy, and contentious election campaigns in France and the Netherlands, negatively impacted activity in Europe in Q1. As a result, targets in the EU accounted for just 17 percent of global cross regional deal value, compared to an average of 35 percent since 2009, according to Baker & McKenzie. Around a quarter of the $41.6bn worth of US investment in the region came from private equity investment, most notably Blackstone Group LP’s $4.3bn acquisition of Aon’s benefits outsourcing business.
Overall, though, Q1 was a busy period for M&A. Though Chinese acquirers, such an integral part of cross-border activity in recent years, may have retreated, and economic uncertainty permeated many developed markets, dealmaking continued at pace.
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