Records fall: reflecting on the 2015 M&A scene
March 2016 | FEATURE | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
With 2016 now firmly upon us and 2015 consigned to the realm of history, it’s natural to look back and reflect on the year gone by – the trends, developments, successes and failures.
Certainly, as far as global mergers & acquisitions (M&A) dealmaking is concerned, 2015 was very much a year of note with an impressive number of transactions announced. According to Dealogic, the year saw 69 deals worth $10bn-plus totalling $1.90 trillion and 10 $50bn-plus deals totally $798.9bn, including two which are among the biggest M&A transactions ever recorded – the $191bn Pfizer and Allergan deal and the $120bn AB InBev and SABMiller transaction, both in November.
All in all, it was a year of record high volume and activity in the M&A space, surpassing $5 trillion for the first time ever. The mega-deal made a triumphant return – in fact, five 2015 deals rank within the top 20 all time deals.
Among the headline figures recorded by Dealogic were: (i) global M&A hitting a record high of $5.05 trillion, up 38 percent on 2014 ($3.67 trillion) and surpassing the previous record of $4.61 trillion in 2007; (ii) US targeted M&A reaching $2.47 trillion (49 percent of global volume); (iii) Asia Pacific targeted M&A exceeding $1.00 trillion for the first time on record ($1.27 trillion); (iv) Europe targeted M&A reaching $1.07 trillion in 2015, up for the third consecutive year‐on‐year period and the highest volume since 2008 ($1.29 trillion); and (v) M&A advisory boutiques appearing on all of the top five announced deals in 2015.
Furthermore, the top four banks leading the global M&A adviser ranking in 2015 each had volumes exceeding $1.00 trillion, with Goldman Sachs leading the global, US, Europe and Asia Pacific M&A volume rankings in 2015. Morgan Stanley led the Japan M&A ranking.
Of course, Dealogic was not the only financial services organisation reviewing M&A performance in 2015; the likes of PwC, KPMG and McKinsey, to name but a few, all provided analysis and evaluation as to the key M&A trends and developments seen throughout the year.
In a December 2015 Podcast, Andy West, a partner at McKinsey, described US and global M&A activity as “reaching a new high in 2015” with “large deals leading the way”. PwC, for its part, characterised the year just passed as “the best year for M&A since the financial crisis”. And in its analysis of M&A performance in the US, KPMG cited an improving economy, strong stock market and cash-heavy balance sheets as just some of the factors which contributed to 2015 being one of the best M&A years on record.
Almost without exception, M&A advisers are unanimous: 2015 was a year of some distinction.
Global M&A trends in 2015: the Americas, EMEA and Asia Pacific
What, then, were the major trends and developments which helped make 2015 such an M&A success story? Amid a welter of global dealmaking dynamics, how did access to capital, regulation and other macro factors impact on M&A? Where were the main sectors of interest and most significant regional hotspots? And what were the key drivers as far as concluding a deal was concerned?
“M&A activity was to a large extent shaped by an abundance of cash that was available to both strategic and financial investors,” says Dr Markus Nauheim, a partner at Gibson, Dunn & Crutcher LLP. “Low interest rates, the strong US dollar, strong balance sheets and high valuations, among other aspects, paved the way for a series of exits in the private equity space in the form of secondaries and tertiaries. Activity was up in multiple sectors around the world, with deals in pharmaceuticals, consumer/retail, energy and telecoms/media – leading the way among the larger transactions above $10bn. In light of the overall geopolitical turmoil, there also seemed to be a tendency to look for more sustainable and crisis-resistant acquisition opportunities.”
Furthermore, Dr Nauheim has observed an increase in M&A activity by Chinese investors in Germany, largely as a result of its reputation for strong industrial technologies, consumer related business brands and high-tech knowledge.
For Laura Lavia Haidempergher, a partner at M&M Bomchil, last year’s energetic M&A dealmaking is good news for Argentina due to the country’s abundant natural resources and industrial capacities, although such vibrancy is actually at odds with what has been seen in this area of the Americas in recent years. “M&A activity has been troubled by local regulations that chased foreign investors away,” she says. “Capital flow restrictions in Argentina, inflation, limits on payment of dividends out of the country, foreign exchange and imports and exports restrictions resulted in M&A activity led by local players.”
Big deals: the big, the bigger and the mega
M&A deals announced in 2015 were a smorgasbord of the big, the bigger and the mega – complex billion dollar transactions negotiated, structured and financed with the maximum speed to achieve the maximum value.
Although large deals were plentiful, such as Royal Dutch Shell’s announcement of its plan to acquire British energy supplier BG Group for $81bn, the $78bn merger of US broadband provider Charter Communications with Time Warner Cable, and the intention of the science and agriculture companies Dow Chemical and DuPont to forge a $78bn ‘merger of equals’, one deal which particularly caught the eye of Dr Nauheim, due to how it was done rather than its size, was industrial conglomerate Honeywell International’s acquisition of German-based energy and water business Elster Group from the UK’s Melrose Industries for £3.3bn ($5.1bn).
“Elster was originally in the process of just selling its water metering business in an auction process,” explains Dr Nauheim. “Apparently, Honeywell was interested in buying the entire company and Melrose was not opposed to that idea. The deal was done in record time in an exclusive and highly confidential process simultaneously to the auction process for the water metering business – nothing leaked into the market.”
When the deal was announced in July 2015 it came as a surprise to most market participants and particularly for the firms that were bidding for Elster’s water metering business. “It was quite an unusual deal in the current – and very competitive – environment as it shows that investors need to be increasingly proactive in their hunt for good assets,” Mr Nauheim concludes.
Global M&A sector breakdown
The healthcare and technology sectors were at the forefront in 2015, totalling $723.7bn and $713.1bn respectively. Major healthcare deals included Anthem’s acquisition of Cigna for $54bn in addition to the Pfizer and Allergan deal. In the technology sector, there was Dell Inc.’s $65bn acquisition of EMC Corporation and the acquisition of the Broadcom Corporation by Avago Technologies.
Within the energy sector there was Royal Dutch Shell’s purchase of BG Group. In the food and beverage sector, H.J. Heinz and Kraft Foods Groups announced a merger valued at $62.6bn, a deal which creates the world’s fifth largest food company. Elsewhere, the Anheuser-Bush InBev acquisition of SAB Miller is set to result in one of the biggest players in the beer industry. In the media & telecommunications sector, the big deal was of course the Charter Communications/Time Warner Cable transaction, a merger that will create the second-largest cable operator in the US.
“If you look at the sectors where M&A has been happening over the last year, largely healthcare and high tech, there are a lot of deals that can still be done,” points out Mr West. “There is a lot of innovation in those spaces, a lot of fragmentation, and there are still quite a few targets out there. If you consider the cash that exists, which is still generally at an all-time high, a lot of it is going to go into dealmaking going forward.”
Transactions finance and debt markets
According to Dr Nauheim, one of the key features of the M&A landscape in 2015 was that access to transaction finance and the debt markets was somewhat easy. “One could even say there has been a shift of paradigm as the banks, for the past 12 to 18 months, have increasingly been faced with competitive bidding processes for transaction finance,” he contends. “Funding is available in abundance and borrowers are increasingly able to determine the lending terms instead of the lenders. In the current market, borrowers have plenty of options. It is not a question of whether the investor gets financing, but whether in turn the lender offers the most attractive terms to the borrower and is therefore able to win the bid.”
In other jurisdictions, however, there were regulatory restrictions during the last year which proved to be an obstacle to obtain external financing. “In this regard, the transfer of foreign currency in and out of Argentina was drastically limited,” notes Ms Lavia. “These policies were an obstacle for the payment of dividends and royalties abroad.”
Valuations and transaction multiples
Naturally, in an M&A deal, the actual worth of the company poised to be acquired is a key determination. Looking back on the impact of the valuation process in 2015, from the perspective of the seller of a German asset, they were considered to be at record highs in certain industries. “There are not enough quality assets to satisfy the appetite of investors,” suggests Mr Nauheim. “It was not seldom the case that assets which in the past might have generated a multiple of 6 or 7, in 2015 sold for a double-digit multiple of, for example, 11 or 12.”
Along with the M&A success seen in 2015, it should be noted that there were a number of failures, with 739 deals withdrawn. Chief among these was Teva Pharmaceutical Industries’ withdrawal of its $49.6bn offer for Mylan. Also dropped was Monsanto’s $48bn bid to acquire Syngenta.
2016 and beyond
Many analysts believe M&A activity in 2016 will remain at the robust levels seen last year. Dr Nauheim, for one, believes the US dollar will stay strong and assets scarce, while divestitures from large corporates will increase in an attempt to concentrate on, and strengthen their positions in, their core businesses, as well as protecting themselves from adverse changes in the market. “We will likely see more exits by private equity investors taking advantage of the continued high valuations,” he adds. “Energy transition and digitalisation will continue to drive M&A activity in 2016 and sectors such as technology, energy, industrials and consumer and retail will stay among the busiest in terms of dealflow.”
Turning to Argentina, Ms Lavia expects M&A transactions to undergo something of a resurgence in the coming months and years due to recent changes in the jurisdiction’s political dynamic. “Since Mauricio Macri became President in December 2015, the Argentinian government has been adopting several measures that are expected to attract foreign investors, reactivating the market,” she relates. “During 2016 it is expected that Argentina will be an attractive destination for foreign direct investment and repatriation of deposits abroad owned by Argentines.”
Upon reflection, M&A activity in 2015 was exceedingly strong in EMEA, Asia Pacific and the Americas. However, although the new year is still young, January 2016 has already seen a considerable slow-down in global M&A activity. The declining oil price, concerns about the reduced growth rates in China and the continued geopolitical risks are having an impact on the markets; the political uncertainties in connection with this year’s US presidential elections will not serve as a confidence builder in the short run, either. For strategic buyers and private equity firms, the months ahead are sure to be another promising but challenging time in the restless hunt for selling, combining and acquiring businesses.
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