Trends in global M&A activity
June 2015 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
The global mergers & acquisitions marketplace has regained its strength after a steady climb out of the financial crisis, with Q1 2015 deal values of over $854bn surpassing 2007 levels. These market conditions have given dealmakers the confidence to proceed with large strategic transactions, some of which may have been previously delayed, and we can expect the trend to continue. According to the Thomson Reuters league tables, average deal size for global M&A increased 22 percent in Q1 2015 from the same period last year. Cross-border transactions have also kept pace with the wider market, accounting for 31 percent of global M&A deal activity.
However, while deal activity by value has risen by 25 percent in Q1 2015, deal volume by number of transactions is down 3 percent during the same period and has been largely flat in recent years. While buyers are not pursuing more transactions, they are willing to put large amounts into M&A and may pay significant prices for strategic or transformational ‘mega deals’ designed to improve prospects for growth and competitive positioning going forward. The first three months of this year saw 14 deals announced with values over $10bn each – the most in that category since 2006 – and the 27 deals valued at over $5bn announced in Q1 marks a 60 percent increase over the same period last year. Deals over $1bn in Q1 2015 helped account for almost 70 percent of total M&A volume in that period.
Global deal values and volumes overall are certainly healthy, but the level of deal activity varies significantly by region. Regions buoying global M&A numbers are Asia and the US. M&A activity for US targets totalled $416bn during the first quarter of 2015, an increase of 33 percent compared to the level of activity seen during Q1 2014 and the strongest first quarter for US M&A since 2000. Similarly, Asia had the strongest quarter on record. EMEA, in the meantime, saw a 5 percent decline in M&A activity in Q1 2015 versus the same period last year, and even within EMEA, some markets have shown significant increase in deal activity (e.g., the UK, Italy and the Middle East), while others have been sluggish (e.g., France and Germany).
Despite the slowdown in some parts of the world, global dealmaking has been spurred on by continued low interest rates, availability of financing and strong equity markets. Strategic buyers see attractive opportunities in different parts of the world and find that they can afford pursuing these opportunities either by low-cost borrowing, relying on significant movement in currency rates or by using their own stock. It is notable that strong equities markets have resulted in a higher proportion of stock-for-stock transactions. While transactions with all-cash or partial cash consideration were prevalent from 2009-2013, it was not at all surprising to see stock being used as the preferred form of consideration in M&A deals in 2014, as we have seen both buyer and seller stock prices increase. The soaring equity markets also mean that takeover premiums have declined since peaking in 2009, as buyers are reluctant to pay a premium above the already high market valuations.
Private equity funds continue to play a major role in global dealmaking and have amassed substantial amounts of ‘dry powder’, yet they often have a difficult time competing with strategic buyers who can justify paying significant amounts, after assessing synergies, to make acquisitions they expect to be accretive. Q1 2015 private equity buyouts fell to the lowest quarterly value since Q2 2010, down more than a third compared to every quarter through 2014. At the same time, after a record year for private equity exits in 2014 with every quarter posting values above $100bn, exit values also fell during the first months of 2015.
Strategic and private equity buyers are not the only active forces in the marketplace anymore. Activist hedge funds, which have become a meaningful part of the fabric of the broad investment community, often spur transactional activity and pressure companies to spin off non-core businesses or pursue other types of M&A transactions. Over the last few years, activist hedge fund managers have significantly increased their assets under management and gained the support of large institutional investors. Assets managed by activist hedge funds have grown to about $237bn, and activist funds received about $14bn in new investments in 2014 alone. Recent research has indicated that about 76 percent of institutional investors view the increase in shareholder activism favourably.
Various industries have seen these trends and market forces apply to them to a larger or smaller extent. Dealmaking in the healthcare sector climbed to over $110bn during Q1 2015, more than double 2014 levels, driven primarily by pharmaceutical companies. Real estate and telecommunications M&A increased 17 percent and 98 percent in Q1 2015, respectively. Meanwhile energy, mining and utilities companies appear to be slower in deal activity in 2015 as they await a rebound in the price of oil and other commodities.
As 2015 continues, we anticipate seeing a strong level of market activity unfold throughout the year, particularly in the regions that have been active in the first quarter.
George Casey is Head of Global M&A at Shearman & Sterling LLP. He can be contacted on +1 (212) 848 8787 or by email: email@example.com.
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Shearman & Sterling LLP