A surge of deals in the pharmaceuticals, energy and consumer sectors has pushed merger and acquisition activity to an all-time high, surpassing 2007’s peak — but dealmakers have admitted that bond market turmoil and geopolitical instability are their biggest worries for 2016.
This year, global mergers and acquisition volumes have surged to a new record level, with the total value of announced transactions climbing to $4.6tn, compared with $4.3tn eight years ago, according to Thomson Reuters data.
Many of these deals have been for tens or hundreds of billions of dollars — including the blockbuster tie-ups between drugmakers Pfizer and Allergan, brewers AB InBev and SABMiller, and oil majors Royal Dutch Shell and BG Group.
Hunger for growth in a weak economic environment, cheap financing and continued pressure from activist shareholders to boost returns drove many companies to combine.
Dealmakers have said these fundamentals remain broadly intact for 2016. However, many have also warned of growing fears among their peers that a fresh terror attack, like that in Paris last month, or another financial crisis could tarnish businesses’ confidence and bring the M&A run to an end.
“There is clearly more caution in the market than there was a year ago,” said Richard Sheppard, co-head of M&A for Europe, Middle East and Africa at Deutsche Bank.
A growing source of angst in the last part of the year has been the high-yield debt market, following concerns that some highly leveraged energy companies may have trouble servicing their debt. Although this so-called junk bond market is small, the risks of a spillover are realistic, bankers warned.
“Turmoil in the high-yield market will absolutely dampen M&A activity, particularly in the larger, leveraged deals,” said Peter Weinberg, founder of boutique investment bank Perella Weinberg Partners.
But Chris Ventresca, co-global head of M&A at JPMorgan, said this might spur a wave of defensive deals as companies try to tackle problems presented by cyclical downturns. “We’ll see more defensive deals in the commodities-linked sectors, with companies facing significant stock price and balance sheet pressure over the past year.”
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Overall, dealmakers appeared confident there was scope for more M&A, as merger activity in 2015 as a percentage of market value was below the percentage for 2007. Thomson Reuters’ figures also show the median multiple of deal value to earnings in 2016 was lower than it was in the 2007 boom.
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“It doesn’t feel like we are in bubble territory yet because the transactions you’re seeing have industrial logic,” said Scott Barshay, a Cravath, Swaine & Moore lawyer, who has worked on more than $250bn worth of deals this year. “Momentum on strategic deals is strong . . . it feels like 2016 is going to look a lot like 2015.”
Wilhelm Schulz, head of M&A at Citigroup for Europe, Middle East and Africa, said it would be harder to replicate the level of activity seen in the US in 2015, after deal values rose 64 per cent year on year, to $2.3tn, according to Thomson Reuters data. However, he noted the Emea region remained well below its 2007 peak and was likely to see some growth.
Mr Ventresca agreed it would be difficult to maintain the level of blockbuster deals next year but said: “We are more likely to see an increase in smaller and midsized deals, as lower valuations have made these companies more attractive acquisition targets, given recent stock price declines.”