Multibillion cross-border deals make a return after five years
It may have started in the US in the first few weeks of the year, but the global mergers and acquisitions boom of 2014 has spread to Europe and Asia – sparking a surge in cross-border deals, as companies seek to exploit favourable market to buy global expansion.
In the first nine months of this year, the value of M&A is nearly two-thirds higher than it was in the same period in 2013, at $2.66tn – a level of activity that frustrated dealmakers have not seen since 2008.
But, more than this leap in value, M&A advisers say the type of deals being done is the clearest sign that market has come back: multibillion dollar cross-border deals, which were almost entirely absent in the past five years, have surged.
“The cross border deals we are seeing are long term, well thought out deals, rather than simply being reactions to the recent market performance in the US,” claims Frank Aquila, an attorney at Sullivan & Cromwell. “Although the individual companies being acquired may have only been identified in the last few months, the decision to come to the US and do a meaningful transaction is something that many of these buyers have been planning for a long time.”
This year’s trend towards cross border M&A – deal values have now passed $1tn for the first time since 2008 – has been helped, at least in part, by corporate tax inversions. Under these deals, US companies use the acquisition of a foreign rival to relocate a lower tax jurisdiction. Pfizer’s abortive $116bn bid for UK drugmaker AstraZeneca – the largest deal attempted in the year to date – was an attempt at such a deal.
However, while tax inversions have been one of the most discussed topics of the year, they have accounted for a relatively small proportion of overall deal volume – and they are now under fire from Washington. A set of executive measures were introduced earlier this month with the aim of withdrawing the financial incentives for US companies to consider a move overseas.
A more significant factor – which the US government has little power, or incentive, to suppress – is the growing desire of European and Asian companies to buy US rivals. So far this year, there have been some $260bn-worth of inbound deals to the US, according to Thomson Reuters.
In just the past month, German companies embarked on something of a spending spree. Siemens paid $7.6bn for Dresser-Rand, a US company that makes equipment used in the oil and gas industry, software group SAP bought US technology business Concur for $8.3bn, and ZF acquired American auto-parts company TRW for $11.7bn. Rather than seeing this jump in cross-border deals as a one off, advisers suggest it is a further sign of a market finding its feet.
“The recent investments in the US by German companies are a return to the norm – they were always more confident in the US than most other markets,” argues John Studzinski, global head of Blackstone Advisory Partners. “It shows that the world is getting back to a commercially confident dealmaking environment.”
Hernan Cristerna, co-head of global M&A at JPMorgan Chase, suggests these Europe-to-US deals will keep coming as European companies “are frustrated that there is no evidence of short-term growth, so they realise they have to go abroad to get that growth. There’s a real frustration about the slow pace of recovery in Europe.”
Doing deals to buy US companies cannot only bring more reliable growth, it can also provide opportunities to cut costs through consolidation, adds William Vereker, head of European investment banking at UBS.
But one set of dealmakers has failed to capitalise so far this year: the private equity groups. Buyout activity among private equity investors has been sluggish, with just $195.6bn of deals announced so far this year – the same level recorded about a decade ago. In the US – the largest single market for leveraged buyouts – activity fell 22 per cent against 2013 levels, to $77bn.
Jorge Mora, US head of financial sponsors at Macquarie Capital, says part of the difficulty is that US companies are awash with cash or cheap debt, and under little pressure to divest parts of their businesses.
“At the same time, a lot of money has been raised by private equity groups and there is growing pressure to put that money to work,” Mr Mora says. “The pressure to invest and the pressure to not overpay are beginning to collide. Combine that with great liquidity in the leverage market, and we are seeing some big prices paid for assets.”
In terms of individual advisers, Goldman Sachs retained the top spot for M&A advisory work. The Wall Street firm worked on some $776bn of deals – almost $100bn more than its nearest rival. One notable change from earlier quarters was the absence of boutique investment banks in the M&A banker rankings. Only Centerview, which has worked on some of the largest deals this year, including the complex four-way transaction between Lorillard, Reynolds American, British American Tobacco and Imperial Tobacco, featured in the top 10.
However, M&A experts predict the best is yet to come. “We haven’t seen the hubris in the boardroom yet, with no outsized megadeal being announced,” says Henrik Aslaksen, head of M&A at Deutsche Bank. “So it feels like there is another leg to this upcycle.”
The day M&A deals stood still
For all the resurgence of “animal spirits”, one day in the past quarter will go down as one of the most depressing for dealmakers in recent years, writes Arash Massoudi. In a matter of a few hours on August 5, two of the highest profile deals of 2014 collapsed – while a third went ahead with worrying implications for other companies.
First to fall was the audacious $71bn bid from Rupert Murdoch’s 21st Century Fox for rival media producer Time Warner. Mr Murdoch’s uncharacteristically quick capitulation caught out both Time Warner – which was still outlining a robust takeover defence – and the market. Shares in Fox leapt as the company instead announced plans for $6bn in share buybacks.
Then Sprint, the US telecoms company backed by Japan’s SoftBank, walked away from its informal bid for larger rival T-Mobile US – a deal that would have consolidated the US mobile phone market from four operators to three.
Sprint’s plans had run into resistance from regulators over competition concerns, which led France’s Iliad to make its own attempt to acquire a majority stake in T-Mobile US. However, the French telecoms group’s bid was rejected shortly afterwards – although it is considering a renewed push.
Finally, US pharmacy chain Walgreens said it would not attempt to change its tax domicile or move its corporate headquarters to Europe as part of its £10bn deal to buy the 45 per cent of Alliance Boots that it did not already own.
That decision sent shares in Walgreens tumbling by a fifth, as dismayed investors realised that the company would not benefit from a lower corporate tax rate through a so-called “inversion” – the politically sensitive move that several US groups had been considering.
Since then, the impact of Walgreen’s decision has been felt elsewhere, denting Pfizer’s chances of redomiciling to Europe after its failed $120bn merger with rival drugmaker AstraZeneca. Other mooted tax inversions – including a $36bn plan by Monsanto, the US seed company, to acquire Swiss rival Syngenta – have also gone quiet.
Indeed, for many bankers, 2014 may prove the best year for dealmaking since 2007 – but still be remembered for the deals that did not come off.
“This is still an environment where people are inherently cautious about M&A plans,” says Charles Martin, senior partner at UK-law firm Macfarlanes. “It’s not like the way it was during the last M&A boom before the financial crisis, where growth at all costs seemed for many to be the order of the day.”
