People are the problem – report

BY Richard Summerfield

Global M&A activity has been one of the most notable stories of recent years. Dealmaking activity climbed sharply in 2015, rising to $4.7 trillion, up 42 percent on 2014. Companies have engaged in deals in new and complex markets, lured by the promise of reduced costs and value creation opportunities.

However, dealmaking today is rife with risk. A new report from Mercer, ‘People Risks in M&A Transactions’, looks at one of the most potent areas of risk: individuals often fail to adapt to organisational transition brought about by M&A, and this can create turmoil. 

If left unchecked, the inability of individuals to manage uncertainty and embrace change brought about by deal making can have a profoundly negative impact on an organisation.

Issues such as employee retention, cultural integration, leadership assessment, compensation, benefit levels and overall talent management are significant. Fifty-five percent of buyers surveyed by Mercer said that employee challenges continue to present significant risks in M&A deals.

Companies are completing deals in a highly competitive and demanding economic landscape. Increased competition and the influence of activist shareholders, for example, are combining to greatly curtail the length of time in which companies can carry out their due diligence procedures. They are under pressure to get deals done quickly.

Forty-one percent of acquiring companies claimed they have less time to complete due diligence compared to three years ago. Furthermore, 33 percent of acquirers believe sellers are providing less information about assets for sale.

“Both buyers and sellers tell us they need rich data, unique insights and practical guidance to maximise transaction value and reduce people-related risks. The goal of our research is to enable business leaders, inside and outside of the HR function, to make more informed people decisions in the current challenging global deal environment," said Jeff Cox, Mercer’s global M&A transaction services leader.

According to Mercer, companies should invest in their employees with the same enthusiasm they have for managing their balance sheet and other investments. By focusing on staff, companies can minimise disruption and increase value in people related areas.

Report: People Risks in M&A Transactions

Mylan’s long deal wait over – shares plummet

BY Richard Summerfield               

Generic and speciality drug company Mylan N.V. has been in an acquiring mood for some time. In November the firm attempted a hostile takeover of rival drug manufacturer Perrigo, offering $26bn but being rebuffed.

However, last week Mylanannounced a deal for Swedish drug maker Meda for $9.9bn, including $2.7bn worth of existing debt. The agreed price for Meda’s shares – SKr165 per share – was more than double the company’s closing price of SKr86.05 on the day before the deal was announced.

Once completed, the transaction will see the combined company boast more than 2000 products including brand-name drugs, generics and over-the-counter medicines. The firm will have a presence in more than 165 countries.

“This transaction builds on everything we have put in place around the world, including our recent acquisition of the Abbott non-US developed markets specialty and branded generics business. Meda brings us greater scale, breadth and diversity across products, geographies and sales channels, and together we will have an even stronger global commercial infrastructure,” said Mylan’s chief executive, Heather Bresch.

But the acquisition has met with dismay among Mylan’s shareholders, partly because Mylan has offered more than 12 times Meda’s EBITDA. Analysts have suggested that the company may have been better off using the cash for other means, such as buybacks.

Following the announcement of the deal, shares of Mylan traded in the US plummeted, eventually closing down 18 percent at $41.42. The company also posted fourth quarter earnings last week, which were sluggish and lagged behind market expectations.

Meda’s shareholders, however, expressed their satisfaction at the transaction. Shares in the company, which are traded in Stockholm, rose 70 percent to $17.41. The company’s largest shareholders, Stena Sessan Rederi AB and Fidim S.r.l., which collectively own 30 percent of Meda, have already accepted the deal.

Despite the concerns of Mylan’s shareholders, and the high transaction value, the acquisition could make strategic sense in the long term, according to a number of analysts and industry observers. Mylan will significantly enhance its position in a number of key markets, including China, Russia and Southeast Asia.

Ms Bresch moved quickly to dismiss fears that the company had overpaid for Meda, “It will take a little time for everyone to catch up with the opportunity,” she said. “I think over the next days and months the value will be realised."

News: Mylan to Acquire Meda

M&A deals drop in oil & gas space

BY Richard Summerfield

Strong headwinds in the oil & gas markets and wider global economic uncertainty have made a significant impact on deal making over the last two years. Indeed, mergers and acquisitions activity in the US oil & gas industry plummeted to its lowest fourth quarter period in five years, according to a new report from PwC.

PwC’s Q4 Oil & Gas Deals Analysis noted that Q4 2015 saw 42 deals in the oil & gas space with values of $50m and above. Those deals recorded in the final quarter of last year were worth $31.6bn. The previous year saw 70 deals worth $103.4bn during the same period. 2015 saw a 69 percent decline in total deal value year on year.

Doug Meier, PwC’s US Oil & Gas Sector Deals Leader, said, “Accelerating declines in oil and gas prices coupled with the closing of the capital markets for oil and gas companies during the second half of 2015 drove management teams to focus on cash preservation. As oil prices stay lower for longer, cash flow will stay constrained resulting in companies operating in survival mode with a focus on realigning their strategies and business models. This internal focus resulted in a steady decline in oil and gas deal activity leading to the lowest fourth quarter in five years, a period that is typically strong for oil and gas deals.

"While the headlines appear depressing, deal-making opportunities exist for companies with dry powder and who are willing to use their equity as currency for doing deals. Looking at the subsectors, midstream companies, including MLPs, were hit with a devastating left-right combination of dramatically lower stock (unit) prices and closed capital markets, resulting in a precipitous decline in the fourth quarter midstream deal activity," he added.

The difficulties seen in deal making in the US in Q4 were experienced the world over last year, according to PwC’s data. In 2015, worldwide power and renewables deal value reached $199bn, a decline of 16 percent from the $236.2bn recorded in 2014. However, in spite of this decline, renewable activity boomed in 2015, nearly doubling year on year from $28.3bn in 2014 to $55.3bn in 2015. Renewables’ share of deal value rose from12 percent in 2014 to 28 percent in 2015.

Europe and the Asia-Pacific region were the most popular locations in terms of number, by both bidder and target in 2015, with 313 and 318 deals in each region respectively. The US led the field on total deal value.

Looking ahead, PwC expects Europe to be a strong focus of activity in 2016 as the region continues to provide the highest volume of global power and renewable deal activity, although deal numbers and value dipped in 2015.

Report: PwC’s Q4 Oil & Gas Deals Analysis

Biopharma M&A expansion to continue in 2016 claims new report

BY Fraser Tennant

Following a record-breaking 2015 which saw deals total $300bn, mergers and acquisitions (M&A) activity within the biopharmaceutical industry is set to continue at a “brisk” pace in 2016, according to the new EY ‘Firepower Index and Growth Gap Report’ published this week.

The EY Index, which measures the ability of biopharma companies to fund M&A transactions based on the strength of their balance sheets and their market capitalisation, reveals that the drivers of biopharma M&A last year included payer consolidation, rising healthcare costs and the intensification of companies’ growth imperatives throughout the industry.  

Among the key findings highlighted in the Index are that: (i) deal activity in early 2015 was driven by specialty pharma companies with a majority of deals by total valuation in the specialty or generics sector (big pharma grabbed the limelight later in 2015 while biotech experienced more modest deals); (ii) big pharma’s aggregate growth gap – the revenue shortfall below global biopharmaceutical sales growth – remained stuck at near $100bn due in part to foreign exchange headwinds; and (iii) specialty pharma’s firepower, has decreased by nearly 50 percent following a recent series of debt-fuelled acquisitions and falling equity valuations.

“While we can’t predict more large transformational deals over $100bn in 2016, we do expect a continued brisk pace for acquisitions and a continuation of the robust divestiture environment, as companies seek to focus on and gain scale in their chosen therapeutic areas,” said Glen Giovannetti, EY’s Global Life Sciences leader. “Three times as many companies now possess at least $3bn in firepower than a year ago, meaning more competition for targets as well as a longer list of potential acquirers for divestitures.”

However, while the Index makes it very clear that biopharma companies continue to benefit from an era of increased drug approvals and healthy pipelines, there are a number of challenges and considerations likely to drive M&A in 2016. These include a renewed focus on value-based drug pricing, staunch competition across key therapeutic battlegrounds and consolidated payer clout, which may exacerbate existing growth gaps and result in a continued feverish deal environment.

“These pressures may make the lofty heights of $200bn in annual M&A the new normal for the foreseeable future,” concluded Jeffrey Greene, EY’s Global Life Sciences Transaction Advisory Services leader.

Report: EY’s Firepower Index and Growth Gap Report 2016

Telecoms giants Orange and Bouygues in $10bn merger talks

BY Fraser Tennant

Following months of speculation, France-based telecommunications giants Orange and Bouygues Telecom have confirmed discussions surrounding a potential merger – a combination that, if it goes ahead, would account for approximately 50 percent of the French mobile and fixed telecoms market.

Although there has been no official statement made as to what a deal may be worth, according reports by MarketWatch earlier this week, Orange has made an offer totalling €10bn ($10.9bn), a submission comprising €8bn in shares and €2bn in cash.

A confidentiality agreement between Orange and Bouygues means that detailed comment from either party has thus far been thin on the ground, but in a statement an Orange spokesperson said that “discussions are not limited by any particular calendar and hold no commitment to any particular predefined outcome".

Furthermore, Orange indicated that it was “exploring the opportunities available within the French telecoms market, while keeping in mind that its investments and its solid position afford it a total independence in its approach".

In an equally sparse statement, Bouygues related that it was “interested in opportunities that would enable it to bolster its long-term presence in the telecoms sector” and would “invest momentum” within a sector which it believes must remain strong to serve the best interests of the consumer.

Much of the merger talk is believed to be due to the disruptive effects of a price war sparked by the entry of a fourth mobile operator – Free Mobile (owned by Iliad SA) – into the French market in 2012. Orange, by way of acquiring Bouygues, hopes to reduce competition, allowing it to invest in high-speed mobile and cable networks and compete with their counterparts in the US and Japan.

However, within a highly fragmented European cellphone market, any attempt at a merger by Orange (the biggest operator in France with 28 million customers) and Bouygues (the third biggest operator with 14 million customers) will require the approval of antitrust authorities and involve the disposal of significant assets.

Should the move by Orange to acquire Bouygues come to pass, analysts believe that the combined company’s market capitalisation could reach €50bn – around 20 percent more than the current value of Orange.

Keeping its cards close to its chest, Orange also stated that it will act solely in the interests of its shareholders, its employees and its customers and be particularly vigilant with regards to the value created through any resulting project.

News: Orange in Talks to Acquire Bouygues Telecom