More but smaller M&A deals in 2016

MEGA DEAL: Drug maker Pfizer bought over Allergan for US$160 billion. The deal is a so-called inversion that would allow Pfizer to lower its tax bill by redomiciling from the United States to Ireland.


    Dec 23, 2015

    More but smaller M&A deals in 2016


    DEALMAKERS celebrating a record year for mergers and acquisitions (M&A) that was bolstered by mega deals are pinning their hopes on a larger number of smaller deals to fuel consolidation next year.

    While the number of announced deals globally declined from last year by 2.1 per cent to 39,687, deal volume rose 40.8 per cent to a record US$4.6 trillion (S$6.5 trillion), according to preliminary Thomson Reuters data, as big companies pursued their dream matches.

    Most of the obvious mega deals have been explored already, investment bankers and lawyers said. But the number of transactions could increase next year as newly merged companies sell non-core assets and smaller companies consider tie-ups to stay competitive, they noted.

    "While the absolute dollar value of deals could very well decline in 2016, we expect the number of deals to increase year-on-year as the market broadens and we see more mid-sized transactions," said Gary Posternack, global head of M&A at Barclays.

    The number of deals this year that exceeded US$30 billion in value was 18. Together, they made up a quarter of the year's total volume. This compares with seven deals worth more than US$30 billion last year, and one in 2013.

    This year's mega deals included many with long-expected operational efficiencies, such as brewer Anheuser-Busch Inbev SA's US$106 billion acquisition of SABMiller, and oil major Royal Dutch Shell's US$70 billion purchase of BG Group.

    Financial engineering was a major factor in some deals. These included drug maker Pfizer's US$160 billion acquisition of Allergan, a so-called inversion that would allow Pfizer to lower its tax bill by redomiciling from the United States to Ireland.

    Other drivers included acquirers' need for speedier growth, as well as their strong balance sheet and confidence that the macro-economic environment was stable enough for them to splash out on big transactions.

    The median value of deals globally as a multiple of the target's annual earnings before interest, tax, depreciation and amortisation rose to 10.6 times this year, the highest since 2007, before a buyout boom ended with the global financial crisis.

    Combined with record deal volumes, this has raised concerns over whether the M&A cycle may be approaching its peak.

    But "this is not an M&A bubble", said Luigi Rizzo, M&A head for Europe, the Middle East and Africa at Bank of America.

    "The record value of deals this year was underpinned by the low cost of capital and the strength of the US dollar."

    A major difference from 2007 has been the absence of big leveraged buyouts. Private equity firms have mostly been sitting on the sidelines, preferring to sell companies to other strategic buyers, rather than trying to outbid them in auctions.

    A choppy junk debt market in the last few weeks has made it even more difficult for buyout firms to be competitive.

    In the US, M&A has totalled US$2.32 trillion so far this year, up 64 per cent from the year-ago period. The US accounted for 51 per cent of worldwide deals, up from 43 per cent a year ago.

    Asia also had a record M&A year, with volumes at US$1.05 trillion, up 58 per cent year-to-date. M&A in Europe reached US$879.6 billion, up 6 per cent, in the strongest year-to-date period for since 2008.

    The dealmaking boom has, unsurprisingly, led to an investment banking bonanza. Fees from completed M&A advisory globally increased 5 per cent year-to-date to US$24.5 billion, estimates from Thomson Reuters and Freeman Consulting show.

    The M&A market could slacken next year, if the economy and political environment turn sour. For example, dealmakers have been speculating about whether a big rise interest rates could dampen dealmaking.

    "I don't think interest rates alone will make a big difference in M&A; however, uncertainty in the financing markets and global political climate could be more of a concern than anything else," said Eileen Nugent, global co-head of law firm Skadden, Arps, Slate, Meagher & Flom's transactions practices.

    "But all of the traditional factors for a robust M&A market are still there and confidence is strong."