2015 M&A Activity Set to Break Previous Record
Mergers and acquisitions look set to reach their highest peak since just before the market crash in 2007 in terms of the volume of activity. Here's a look at some of the year's biggest transactions and trends.
When Dow Chemical and DuPont announced in mid-December that the two companies, with more than 300 years of history between them, would be combining in a 130 billion dollars deal it was emblematic of the year in mergers and acquisitions in 2015. As the year draws to a close, the value of M&A deals in 2015 is on track to hit a new record, eclipsing the 4.61 trillion dollars in transactions completed in 2007. What are the trends driving this record transaction amount, and what does the future hold in store for mergers and acquisitions? Here is a look at some of the notable deals in 2015, including the sectors that have been particularly active this year, the forces that have been driving this activity and the outlook for 2016.
Mega-deals Drive Activity in 2015
The Dow-DuPont tie-up is just one of a number of large deals this year that have driven up the overall value of M&A activity. Other notable mega-deals in 2015 include AB InBev's 106 billion dollars acquisition of SABMiller, Shell's 70 billion dollars takeover bid for BG Group and Dell's 67 billion dollars purchase of EMC. Hardly a week has gone by this year without the announcement of one eye-popping deal or another, driving up the overall value of the M&A market in 2015. But while the value of deals completed this year is on track to set a new record, with 4.75 trillion dollars in transactions for the year to date with just a few days remaining, 2007 will continue to represent the high mark in terms of the number of transactions. This points to one of the major trends in 2015 – the rise of the mega-deal. This has been a record-breaking year for mega-deals, with dozen of deals valued at more than 10 billion dollars this year. The average deal size in 2015 is more than 1 billion dollars, but there have been fewer than 19,000 deals worldwide compared to the nearly 24,000 transactions in 2007, according to Dealogic. This shows the importance of valuations over the sheer quantity of deals being made.
Tech and Healthcare Have Been Particularly Strong
There has been especially strong activity in the tech and healthcare sectors. There are various reasons for the relative strength of these two sectors. For example, Dell's acquisition of EMC, in which Credit Suisse acted as the financial advisor to the company and its co-bidder, Silver Lake Partners, was an attempt by the personal computer maker to strengthen its product lineup in other areas and stave off competition. Tech companies face constant pressure to innovate given the rapid pace of technological change, and acquisitions offer a quick way to offer new products and tap markets. Healthcare industry mergers, by contrast, are being driven by several factors, such as the Affordable Care Act and shareholder demands for higher returns. This sector has seen some of the biggest combinations, with Aetna's acquisition of Humana for 56 billion dollars – pending regulatory approval – at the top of the list. And investors continue to pressure companies to increase profits, even if that means gobbling up competitors. Geographically, mergers have been especially strong in the US, thanks to the robust economy, and Asia, as companies search for bigger gains overseas through "inversions" – a strategy to reduce corporate taxes by moving operations offshore.
The Forces behind Consolidation
So what are the reasons behind the frenzy of deals this year? "A low-growth macroeconomic environment, coupled with opportunities to grow by adding new business lines and customers, is driving M&A," says Greg Weinberger, the Co-Head of Global M&A at Credit Suisse. Companies have been in search of growth. While the US economy has been fairly robust, global sales have been sluggish and companies are looking for ways to boost their bottom line and satisfy shareholders. In the absence of organic growth, companies have sought to scoop up rivals or arrange mergers with competitors. This was one of the factors in the Dow-DuPont merger, as investors clamored for higher returns from the two storied chemicals giants. Many companies are in a position to acquire competitors thanks to the large piles of cash they have stockpiled and low interest rates.
So does the December rate hike by the Federal Reserve threaten to choke off merger activity? "I don't think the rate increase will have a meaningful impact on M&A, as any rate rise should be viewed as a sign of confidence in the economic climate," says Robin Rankin, the Co-Head of M&A at Credit Suisse. "In our experience, M&A activity tends to be more correlated with GDP growth and, in turn, boardroom confidence, than with rate movements."
The Outlook for 2016
So what does the future hold for mergers and acquisitions? While it is difficult to predict because of the volatility of the global economy – with unsteady economic growth in China, geopolitical crises and the threat of terrorism – M&A deals generally come in waves that last four to five years. Credit Suisse's Rankin believes the current cycle is strong and will continue for another two years. She sees consolidation in certain sectors, such as agriculture, semiconductors and oil and gas. Although there are no guarantees in the field of mergers and acquisitions, the "pipeline for next year looks strong," she says. Much depends on outside forces such as the general state of the global economy and geopolitical events, but it is unlikely that CEOs' appetite for mergers has been fully sated.