Merger Boom Set to Continue as Firms Sit on Cash Piles
Unprecedented liquidity, cheap financing and growth plans fuel global M&A deals, driving up prices. This year is likely to be the best year ever for M&A, with no signs of a slowdown or overheating – for the moment.
The total value of global merger and acquisition (M&A) deals may well reach a new high in 2015, beating the previous record dating back to 2007. “A low-growth macroeconomic environment, coupled with opportunities to grow by adding new business lines and customers, is driving M&A. We are on track to match or beat the 2007 high,” said Credit Suisse’s co-head of global M&A, Greg Weinberger. The global M&A volume for 2015 is set to rise by around 11 percent compared to last year, according to Intralinks’ Deal Flow Predictor.
The global M&A volume had already reached 3 trillion US dollars by August 11, Dealogic data show, spurred by a 48 percent increase in mega deals exceeding 5 billion dollars. Out of these, 31 deals exceeded the 10 billion dollar threshold. “This increase in the number of mega deals marks a pronounced shift away from the smaller transactions that have been the bread-and-butter work for investment bankers since the global financial crisis began,” said Philip Whitchelo, VP of Strategy & Product Marketing at Intralinks.
Strategic Opportunities Motivate Buyers
A KPMG study carried out among M&A professionals showed that the primary reasons behind an intended acquisition are either opportunistic – a target becomes available – or that it enables the firm to expand its geographic reach or client base, or enter new lines of business. There is a virtuous circle of M&A growth drivers in the current environment: companies have amassed large cash reserves and have an unprecedented access to financial liquidity. They are also eager to secure growth opportunities and attain increased market share. “M&A as a route to growth is firmly back on the boardroom agenda,” said Pip McCrostie, EY’s Global Vice Chair, Transaction Advisory Services. Companies are also encouraged by the low interest rates, the improved economic outlook, and view acquisitions as a way of gaining access to fast growing emerging markets. The search for additional specialization has also fostered some deals. Numerous acquirers look for companies with a niche positioning in areas ranging from new materials and technology to orphan drugs. All these factors have resulted in buoyant M&A activity, which in turn have driven up valuations. Readily available cheap financing has fuelled the selling prices even higher.
Valuations on the Rise
During the first half of the year, average valuations in the US deals reached 16.5 times earnings before interest, tax, depreciation and amortization (EBITDA), beating the previous record of 14.3 times in 2007, Thomson Reuters data show. “Deal multiples are elevated, while bid-premiums are in line with midpoints of prior M&A cycles,” according to EY’s McCrostie. “Valuations are expected to reach a new high (in 2015), despite heightening concerns of a developing price bubble,” Interlinks added. On the other hand, private equity (PE) firms’ M&A transactions substantially slowed during the first half of the year compared to the same period in 2014. This suggests there is potential for a sharp rise in PE sell-side transactions during the coming months, boosting valuations even higher.
No Signs of Over-Heating – Right Now
M&A activity should remain strong during the second half of the year. More than half of the global executives surveyed by the Global Confidence Barometer replied that they plan acquisitions in the next 12 months. But there is no evidence of over-heating for the moment. Global M&A deal values are indeed at record highs, but “there has been no associated increase in the volume of deals during the last M&A cycle. That suggests a high level of discipline in selecting the right deals. Other key measurements show headroom in the current cycle. Total M&A value as a share of global GDP is well below previous highs,” EY’s McCrostie said.
Healthcare Mergers in the Lead
The sector recording most M&A activity over the past couple of months is the healthcare sector, with deals worth 482 billion by mid-August, a figure exceeding the previous full year record set in 2014. The demand is driven by the search for new innovative drugs and therapeutics to widen pharmaceuticals’ existing pipeline of drugs. In the US, the Affordable Care Act also seems to be behind the increased M&A activity among health insurers, hospitals and other health-care providers. The technology sector ranks second with deals valued at 382 billion dollars, as tech companies strive for increased revenues, access to new intellectual property and talent, bolt-on acquisitions to enhance new products, and the desire to enter new markets. The Oil & Gas sector ranks third, boosted by Royal Dutch Shell’s pending 70 billion dollar bid for BG Group – this year’s largest deal . The volatility in benchmark crude oil prices is one factor behind the intensification of the sector’s M&A activity.
US & Europe Lead Deal Activity, Latin America Lags Behind
North America and Europe are likely to continue to dominate M&A growth throughout 2015. The US accounted for nearly half of the global total value of announced deals during the first half, with investors are attracted by a relatively healthy growth rate and open credit markets. The Asia Pacific region is also part of the M&A boom, as companies look for exposure to fast-growing emerging markets. Latin America does however significantly underperform, negatively affected by the weaker global demand for commodities and low oil prices.
Many Failed Deals Too!
It is worth highlighting that despite the record M&A activity just mentioned, not all deals actually go ahead. Antitrust or competition issues, or other reasons such as interlopers and shareholder activism, block planned or discussed deals. There were 686 billion dollars in failed deals in 2014, according to JPMorgan data. This huge figure is, however, consistent with previous upswings in M&A activity.