M&A grows as UK economy recovers
Mergers and acquisitions (M&A) are booming. Research published by Dealogic found that global M&A volumes in the first half of 2014 were $1.83 trillion – 41 per cent higher than the same period last year and the highest first-half volume since before the financial crisis. Volumes were highest in the healthcare sector, which represented 17 per cent of M&A, followed by telecoms and real estate.
In the UK, a slower first quarter was followed by a much stronger second quarter, with deal values for the first half of the year reaching £37.5 billion, according to Mergermarket. While inbound M&A was 21.8 per cent down on the same period last year, outbound M&A increased to £48 billion – the largest in any half year since 2007.
Meanwhile, Lloyds Bank Commercial Banking’s Acquisition Finance team reports that it deployed £1.6 billion of debt funding to support the private equity sector and the acquired portfolio companies in the 12 months to July 2014 – a 46 per cent increase on the previous year.
As in the United States, the UK’s healthcare sector provided the greatest activity, with pharma, medical and biotech commanding 26.9 per cent of the market in the first half of the year, says Mergermarket, and activity could have been even greater if Pfizer’s bid for AstraZeneca had been successful.
The most notable mega-deal for the sector – and for the UK market as a whole – was the sale of GlaxoSmithKline’s oncology division to Novartis for £8.6 billion in April, in a complex asset swap which also saw Novartis sell its vaccines business to GSK and its animal health division for Eli Lilly.
Other notable deals include the £3.8-billion merger announced by Carphone Warehouse and Dixons in May, as well as the purchase of Sheffield-based jet engine components manufacturer Firth Rixson by New-York based metals technology company Alcoa for $2.85 billion.
WHAT’S DRIVING M&A?
So why are companies choosing to engage in M&A in the current market? A stronger economy has played an important role in driving the market forward; the UK’s GDP growth was 3 per cent higher in the third quarter of 2014 than in the same period last year. At the same time, fears about the possible break-up of the eurozone have continued to subside.
A stronger economy has played an important role in driving the market forward
In the last few months, these factors have contributed to an increase in IPO (initial public offering or stock market launch) activity as well as M&A transactions. James Fillingham, a partner at PwC transaction services, says the beginning of the year was characterised by a burst of IPOs as a result of favourable prices, but that as markets have become choppier, companies have tended to opt for M&A instead.
Economic growth is only one of the factors shaping the current attractive M&A market conditions. Ian Sale, a managing director at Lloyds Bank Commercial Banking’s Acquisition Finance, says: “We have seen demand and supply conditions for M&A improve markedly over the past year. Investors looking for yield, cash-rich trade buyers, a hungry banking sector and private equity houses with funds to deploy have all contributed to a highly liquid market.”
In addition, intense competition between funders has supported valuations and persuaded more vendors to bring businesses to market, and management teams to consider buyouts and external investment, he says.
Companies are increasingly looking further afield as they seek to grow their businesses. “The world is changing and companies continually need to evolve their offering,” says David Blois, managing partner at M&A Advisory. “Corporations are looking to develop themselves by going into new geographies, technologies and market sectors, and that is driving demand for M&A.”
The availability of debt is also playing a key role in driving activity. Dave Rome, head of Europe, Middle East and Africa (EMEA) loan markets at RBS, says that UK loan volumes in 2013 were $142 billion, 8 per cent of which were M&A related. “Year to date we’ve seen volumes of $187 billion, of which 17 per cent have been M&A related,” he says. “So there’s been a real uptick in the percentage of loan facilities that have been acquisition-based facilities rather than refinancing.”
While UK companies have traditionally relied upon bank debt, the last few years have seen more companies adopting the US model and choosing to access the capital markets in order to fund acquisitions. Nevertheless, this trend is not set in stone and corporate funding decisions continue to evolve.
“Debt has been very freely available – albeit the public capital markets are shifting at the moment,” says Mr Fillingham. “Whereas bonds were flying off the shelves at amazingly low prices earlier in the year, they are now harder to get away. We’re now seeing classical bank debt playing a greater role in M&A.”
The market continues to evolve. Despite the economic confidence that has characterised this year, Mr Rome points out that recent weeks have brought a reasonable amount of volatility and that next year’s general election could impact on M&A activity in the UK.
However, he is optimistic about prospects for 2015. “We think there is a reasonable amount of activity on its way, barring any unforeseen macro-economic shocks,” he concludes.