Digital disruption drives deals – EY

BY Richard Summerfield

The digital revolution of the last few years has had a significant impact on almost all facets of our daily life. Smart phones, cloud computing and Big Data have integrated into our daily routines almost seamlessly, and it is for that reason that the digital transformation of businesses has become such a valuable development.

This emerging reliance of mobile, cloud and Big Data technology is significant for many reasons, not least of which is the manner in which it is helping to drive mergers and acquisitions in the technology space. According to a new report from EY, 'Capital Confidence Barometer – Technology', companies are turning to cloud and mobile technology as they look to remain relevant in an increasingly competitive and demanding industry. EY’s data suggests that to the end of October the value of tech related M&A deals was $396.4bn; as such, the record of $412.4bn worth of tech deals announced in 2000 is likely to have been exceeded by the end of the year.

The impressive pace of M&A driven deals is also unlikely to slow going forward, according to EY. Forty-five percent of the technology executives surveyed for the report noted that they intend to pursue deals in 2016; this number is higher than in the last three surveys carried out by EY in the third quarter of the year.

Thirty-four percent of respondents will look outside of their own sector. Thirty-seven percent believe that ‘digital future’ – EY’s term to describe the disruption of all areas of enterprise caused by technology – is the most important driver in M&A deals today.

Jeff Liu, Global Technology Industry Leader, Transaction Advisory Services at EY, said, "As the overall M&A market hits its stride, the technology sector has continued to shatter M&A records from one quarter to the next. While digital disruption is not a new story, we have clearly entered a new chapter in its impact on M&A. It is one in which the customer is becoming a more digitally empowered protagonist. Changing customer behaviour is driving technology company acquisitions of non-technology companies — and vice versa."

Given the increasing confidence in the global economy, tech companies are feeling bullish about completing further deals in the year ahead. Though many tech executives are concerned about lingering geopolitical difficulties and their effect on the wider global economy, they will not be put off pursuing deals. With companies willing to commit 60 percent of their available capital to growth in 2016, the deals will keep coming.

Report: Capital Confidence Barometer — Technology

Beers still on ice as regulatory hearings loom

BY Richard Summerfield

The $106bn mega merger between beer rivals Anheuser-Busch InBev and SABMiller is approaching a key crossroads as regulatory concerns on both sides of the Atlantic are addressed.

In light of antitrust issues in Europe, it is believed that Anheuser-Busch InBev will sell the Peroni and Grolsch brands it will gain from its merger with SABMiller. Indeed, AB InBev will likely divest of several SABMiller brands as the majority of the company’s products are European-focused. The combined company’s dominance of the European market would undoubtedly be a red flag for European regulators.

The loss of two of SABMiller’s four global brands will have a significant impact on the company in terms of both volume and profitability. Yet reducing the lucrative European portfolio is a necessary evil if AB InBev is to win merger approval. Dutch group Heineken, US based Molson Coors and Irish firm C & C Group have all been mooted as potential acquirers of the Peroni and Grolsch brands, expected to sell for billions of dollars.

Away from Europe, the merger has already acted as the catalyst for a number of divestitures. To appease antitrust concerns in the North American market, SABMiller will sell its 50 percent voting interest and 58 percent economic interest in MillerCoors to Molson Coors, its partner in the joint venture, for around $12bn. The Miller brand is one of the most important, and highest selling beer franchises globally.

Next week the merger between the two firms will be subject to a US Senate hearing according to the Senate Judiciary Committee.

Outside of Europe and the US, regulatory concerns around the deal remain. Chinese regulators in particular are expected to create further difficulties down the road.

News: Anheuser-Busch InBev to sell Peroni, Grolsch to smooth merger - FT

Record-breaking $160bn deal sees Pfizer buy Allergan

BY Fraser Tennant

In a deal believed to be the largest in healthcare history, biopharmaceutical giant Pfizer Inc. has announced that it is to acquire speciality pharmaceutical company Allergan plc – a transaction that will create a new global leader in biopharma business and innovation.

Under the terms of the definitive merger agreement, Pfizer will combine with Allergan in a stock transaction currently valued at $363.63 per Allergan share, for a total enterprise value of approximately $160bn (based on the closing price of Pfizer common stock of $32.18).

Allergan shareholders will receive 11.3 shares of the combined company for each of their Allergan shares, and Pfizer stockholders will receive one share of the combined company for each of their Pfizer shares.

“The proposed combination of Pfizer and Allergan will create a leading global pharmaceutical company with the strength to research, discover and deliver more medicines and therapies to more people around the world,” said Ian Read, chairman and chief executive of Pfizer. “Allergan’s businesses align with and enhance Pfizer’s businesses, creating best-in-class, sustainable, innovative and established businesses that are poised for growth. Through this combination, Pfizer will have greater financial flexibility that will facilitate our continued discovery and development of new innovative medicines for patients, direct return of capital to shareholders, and continued investment in the United States.”

Under the terms of the transaction, unanimously approved by their boards of directors, the businesses of Pfizer and Allergan will be renamed ‘Pfizer plc'. The new entity’s board is expected to consist of 15 directors and will be led by Mr Read (continuing his previous role) and Brent Saunders (currently Allergan’s chief executive) as president and chief operating officer.

“The combination of Allergan and Pfizer is a highly strategic, value-enhancing transaction that brings together two biopharma powerhouses to change lives for the better,” said Mr Saunders. “This bold action is the next chapter in the successful transformation of Allergan allowing us to operate with greater resources at a much bigger scale.”

Upon closing, the combined company is expected to maintain Allergan’s Irish legal domicile – a move which has seen the US-based Pfizer accused of corporate tax avoidance (i.e., tax inversion) by president Obama, among others. 

Nevertheless, subject to certain conditions, including receipt of regulatory approval in certain jurisdictions such as the US and EU, and the receipt of necessary approvals from Pfizer and Allergan shareholders, the transaction is expected to complete in the second half of 2016.

News: Pfizer to buy Allergan in $160 billion deal

Marriott and Starwood agree $12.2bn merger

BY Richard Summerfield

US hotel chain Marriott International has agreed to acquire its rival Starwood Hotels & Resorts Worldwide, Inc for around $12.2bn. The deal, once completed, will create the world’s largest hotel chain.

Marriott will pay $11.9bn in stock and the rest in cash. The deal is expected to close in mid-2016.

Under the terms of the deal, Starwood’s shareholders will get 0.92 shares of Marriott and $2 in cash for each share of Starwood common stock held. Separately, they will also get $7.80 per Starwood share upon completion of a spin-off of the company's timeshare business to Interval Leisure Group. The total valuation of each Starwood share is around $72.08, a premium of roughly 19 percent on the company’s share price before rumours of the deal began to appear.

Both boards have unanimously agreed to the merger, although the deal is still contingent on shareholders approval, as well as regulatory approval and other customary closing conditions.

In a joint statement announcing the deal, Arne Sorenson, president and chief executive of Marriott International, said: “The driving force behind this transaction is growth. This is an opportunity to create value by combining the distribution and strengths of Marriott and Starwood, enhancing our competitiveness in a quickly evolving marketplace.  This greater scale should offer a wider choice of brands to consumers, improve economics to owners and franchisees, increase unit growth and enhance long-term value to shareholders.  Today is the start of an incredible journey for our two companies.  We expect to benefit from the best talent from both companies as we position ourselves for the future”.

Combined, the new company will operate around 5500 hotels worldwide and more than one million rooms. By comparison, Hilton Worldwide, the next largest hotel company, has around 4400 properties and approximately 720,000 rooms.

Bruce Duncan, chairman of Starwood, said: “During our comprehensive review of strategic and financial alternatives, it was clear that our talented people, world-class brands, global leadership and spirit of innovation were much admired and key drivers of our value. Our board concluded that a combination with Marriott provides the greatest long-term value for our shareholders and the strongest and most certain path forward for our company.  Starwood shareholders will benefit from ownership in one of the world’s most respected companies, with vast growth potential further enhanced by cost synergies. Starwood’s shareholders will also receive the value of the previously announced sale of our vacation ownership business to Interval Leisure Group, which is not part of this transaction.”

Following completion of the merger, Marriott’s board will increase from 11 to 14 following the addition of three members of Starwood’s board. Marriott expects to deliver annual synergies of at least $200m in the second full year after the transaction closes.

News: Marriott to buy Starwood to create world's biggest hotel chain

M&A still the way to go - EY

BY Richard Summerfield

2015 has seen the continuation of considerable volatility and uncertainty in areas of the global economy. Commodities and currencies have remained unpredictable while emerging markets have floundered – China in particular has experienced a notable slowdown this year.

Yet despite these difficulties, companies have remained committed to pursuing M&A deals. 2015 has been a notable year for deal activity, and that appears certain to continue into 2016, according to a new report from EY.

EY’s latest biannual report – the Capital Confidence Barometer – surveyed 1600 senior executives from large multinationals about their global and domestic economic outlook.

The report suggests that companies remain confident about dealmaking in the current global climate, despite some considerable headwinds. Fifty-nine percent expect to pursue acquisitions over the coming 12 months, up from 56 percent of respondents in April’s report. EY believes that the swell in M&A appetite follows the stabilisation of business confidence among top companies.

Notably, many firms are looking to complete deals outside of their typical industry boundaries. According to EY, this strategy toward targeting cross sector deals has been partly driven by changing customer preferences and the impact of innovative disruption.

Cross-border activity is also set to play a key role in shaping M&A activity. As competition for assets and value creation heats up, companies are continuing to look beyond their national borders to target new areas of growth. According to the survey respondents, the eurozone is an increasingly attractive investment location.

“In short, M&A is back as an essential mechanism for generating long-term value. With global macroeconomic growth tempered and their industries perpetually challenged, executives are searching for more than organic growth,” says Pip McCrostie, EY’s global vice chair of transaction advisory services. “In government and global leadership circles, ‘sustainability’ has long been a buzzword for big-picture thinking about the interdependence of nations and resources to support development worldwide. In their way, executives are pursuing their own form of corporate sustainability, reimagining their businesses to both safeguard the last decade’s cost-reduction rigor and build the next decade’s platform for growth."

Report: EY Capital Confidence Barometer, October 2015