M&A keeps record-setting pace as world’s dealmakers get active
M&A quarterly data show record-setting pace
While the activity did not surpass this year’s record-shattering second quarter, the dealmaking marked the first time in 15 years that mergers and acquisitions had topped $1tn in two consecutive three-month periods.
The themes of the surge remained consistent with the activity of the past two years. Organic revenue growth remains anaemic for many companies, so they are generally reluctant to invest additional capital in their own businesses. Instead, executives are turning to mergers and acquisitions to find new opportunities in their industries. The enthusiasm for dealmaking has also been stoked by the availability of historically cheap debt and elevated share prices that make transactions easier to pull off.
The result has been a succession of big and transformational deals.
Warren Buffett, the 84-year-old billionaire investor, made the biggest acquisition of his career when his Berkshire Hathaway agreed to buy US engineering group Precision Castparts for $32.5bn.
Meanwhile, Ace Group struck the largest deal on record in the property and casualty insurance sector with a $28.3bn takeover of rival Chubb.
The two transactions highlighted the speed with which many companies are moving. Berkshire Hathaway and Ace conceived of and reached their deals in a matter of several weeks.
Dealmaking on track for new record
Global dealmaking is on track for an all-time record in 2015. The value of mergers and acquisitions struck over the past nine months has risen 32 per cent on the same period a year ago to $3.17tn.
Dealmakers say companies need to “buy” additional revenue because a relatively moribund global economic environment has made ordinary growth elusive. The level of M&A is set to surpass the levels seen during the credit-fuelled takeover boom of 2007.
Anu Aiyengar, head of North American M&A at JPMorgan, says the total deal values in that region will “definitely beat the all time record of 2007” — although she warns that market volatility could delay some transactions.
“This has been a tremendous year, but the choppiness in the market is affecting some deals,” Ms Aiyengar notes. “Locking in the financing becomes harder during times of market turbulence.”
Merger and acquisition activity has been the strongest in the US and Asia. In both regions, deal values are at their highest year-to-date levels since records began.
Announced transactions in the US stand at $1.5tn so far this year, up 48 per cent from 12 months ago. In Asia, volumes rose 58 per cent to $773bn, compared with the same period last year. In Europe, dealmaking hit its highest level since 2008, rising 6 per cent to $671bn.
Cross-border flavour
The volume of deals involving companies from two different countries has reached its highest quarterly level in the current cycle. A total of $428bn in deals were so-called cross-border transactions, accounting for 42 per cent of activity in the period.
Tax inversions — deals in which an acquirer uses a takeover to relocate its tax base to a country with lower rates — began to reappear with greater frequency despite efforts by the US government to crackdown on companies pursuing those transactions.
US fertiliser producer CF Industries purchased a series of assets for $8bn from its Dutch-listed rival OCI that will allow it to become a top producer of nitrogen fertlizer and also redomicile its tax base to the UK to escape US taxes. By doing so, CF will in effect be able to reduce its corporate tax rate from 35 per cent to 20 per cent.
The prevalence of countries with relatively low corporate tax rates, the weakness of the euro and a more stable economic backdrop made Europe the premier destination for takeovers this year, advisers said.
Severin Brizay, head of M&A for Europe, Middle East and Africa at UBS, says: “Five years ago, Europe was scaring everyone and now that is gone. The market is open and there is very little protectionism.”
Megadeals flourish
The number of deals greater than $5bn in value is on pace to surpass the previous record. A total of 96 so-called megadeals have been struck so far in this year, accounting for 47 per cent of all deal activity.
At a time of low borrowing rates and weak growth, companies are under pressure from investors to do something else with their large cash piles after years of share buybacks.
Anheuser-Busch InBev, the world’s largest brewer, confirmed earlier this month that it intended to make a takeover offer for its nearest rival SABMiller, in what would be one of the six largest deals ever.
Elsewhere, acquisitive cable group Altice struck its latest deal with a $17.7bn takeover of US telecom operator Cablevision.
Paul Stefanick, global head of investment banking coverage and advisory at Deutsche Bank, says: “It is still all about the megadeals. We haven’t seen a huge increase in deals below $5bn. The economy is not growing any faster and large companies searching for growth are getting higher share prices when they announce deals.”
Energy and healthcare lead the way
Large deals in the energy and power industry, together with a record level of M&A activity among healthcare companies, meant that these two sectors accounted for nearly 30 per cent of all dealmaking in the first nine months of the year.
News this week of Energy Transfer Equity’s $38bn acquisition of Williams, an effort to create a leader in the oil and gas pipeline industry, helped lift total M&A in the energy sector to $475bn so far this year — a 23 per cent increase on the same period in 2014.
Analysts say that the Energy Transfer Equity-Williams combination highlighted how low energy prices have been forcing companies in the sector to seek deals, after a period in which buyers were asking for higher prices than sellers were willing to pay.
“People are beginning to reconcile themselves with making deals at lower valuations, which is reflective of a grimmer view of hydrocarbon prices,” explains Skip McGee, founder of boutique advisory firm Intrepid Partners.
Activity among healthcare companies has remained robust, pushing the overall value of deals for the year to date up to $460bn — up 14 per cent from a year ago.
Some bankers admit that the boom in the healthcare sector is likely to slow next year, but most say they expect more deals to be done.
David Kostel, head of healthcare M&A at Credit Suisse, says: “This will be driven by [chief executive] confidence, a need for acquisition growth given slowing organic growth rates, the desire for increased scale to drive cost savings, and the very positive reception from many healthcare mergers over the past several years.”