Quality not quantity for M&A

High-value global deals are leading the way in a mergers and acquisitions drive powered by cash-rich corporates, writes Sally Percy

Quality rather than quantity has been the defining global trend in corporate M&A in 2014. According to data from financial information provider Mergermarket, 12,693 transactions had taken place worldwide by the start of November, down from 14,511 for the same period in 2013. In contrast, total deal values have leapt by more than 10 per cent. 

This jump in values can be partly attributed to the string of so-called “mega-deals” that have been agreed in 2014. These include the sale of French telecoms giant SFR to cable company Numericable, the merger of US pharmaceutical companies Actavis and Forest Laboratories, and US conglomerate General Electric’s acquisition of the energy business belonging to French rail company Alstom. 

“The last few years have been relatively flat in terms of M&A value, which is surprising given that cheap debt was available,” says Kirsty Wilson, global research editor at Mergermarket. “But this year there has been a huge sense of confidence, which has enabled these large transactions to take place.” 

CROSS-BORDER TRANSACTIONS

Cross-border transactions have been another marked feature of the year. They made up 43.6 per cent of all transactions by value in 2014, according to Mergermarket, the highest proportion since 2007. In particular, a lot of transatlantic transactions have taken place as businesses in North America and Europe have sought opportunities in each other’s market. Tax inversion strategies have been a factor in a number of deals with US companies targeting European businesses with a view to moving their headquarters and benefiting from a lower rate of corporation tax. 

This year there has been a huge sense of confidence, which has enabled large transactions to take place

“US corporates are driving cross-border activity, followed by Chinese, British, German and Canadian strategic investors,” explains Andrew Ballheimer, global co-head of corporate at law firm Allen & Overy. “Corporates have been sitting on significant amounts of cash for a long time and they haven’t been spending it. That, combined with low interest rates and increased availability of debt, has allowed boards to be more confident about making significant strategic moves.” 

M&A activity in the high-growth economies is lagging behind that of the more developed markets. According to Allen & Overy’s M&A Index for the third quarter of 2014, the US provided the targets for the largest number of deals by far, followed by the UK, Germany and Canada. Meanwhile, Mergermarket data shows the value of transactions taking place in the emerging markets has fallen 6.3 per cent year on year while the number of deals dropped from 3,181 in 2013 to 2,724 in 2014. 

AFRICA AND CHINA

Explaining this phenomenon, Mr Ballheimer says: “While the prices in the mature markets may be higher, the deal execution risk is lower than in the emerging markets.” 

Despite having been touted as the home of some of the world’s hottest growth prospects in recent years, Africa has been particularly badly affected by the backlash against emerging markets. China’s slowing economy means the country has less demand for the minerals and commodities that Africa produces and the Ebola outbreak, which has already killed some 5,000 people, has also played its part. 

“Transactions involving African targets were down significantly in the first half of 2014, both when compared with the first half of 2013 and when compared with a three-year average,” says Matt Dixon, corporate finance director at advisory firm Corbett Keeling. 

China has registered a 21.3 per cent increase in the value of its M&A activity during 2014, according to Mergermarket. But it is notable that most of the activity is inbound, involving target Chinese companies with the buyers tending to be other companies in Asia. Chinese outbound M&A activity has fallen by almost a quarter year on year. Mr Ballheimer says that, while Chinese businesses are “very interested in lots of targets”, the internal and external processes they need to go through in order to secure approval for a deal can slow down their ability to close it. 

The sectors leading this year’s M&A charge are also having a bearing on the markets where activity is greatest. While the energy, mining and utilities sectors were making the most acquisitions in the years immediately following the financial crisis, this year it is technology, media and telecommunications (TMT) that have been grabbing the headlines, along with pharmaceuticals.

In the TMT space, companies are vying to get an edge over their competitors by buying businesses that own cutting-edge technology. Meanwhile, the big names in the pharmaceutical industry are facing a patent cliff due to a large number of their drugs going off-patent, knocking billions of pounds off their profits. So they are using the cash on their balance sheets to invest in smaller biotech companies that have active drug development pipelines. 

If 2014 has been the year of the blockbuster deal in global M&A, what is 2015 likely to bring? Mergermarket’s Ms Wilson believes that buyers may become more cautious over the coming months and notes: “We could see a drop in activity next year.”