Mega deals drive global M&A activity
London, March 31, 2014
A string of large transactions drove the value of global mergers and acquisitions (M&A) activity up by 54 per cent in the first quarter compared to the same period last year, reflecting greater deal-making confidence among chief executives.
The value of worldwide announced deals totaled $710 billion in the first three months of the year, according to Thomson Reuters data, which includes competing bids for Time Warner Cable and SFR. Global M&A is up 35 per cent excluding these competing bids.
Almost half of the M&A pot came from deals worth $5 billion or more.
The number of deals however dropped by 14 per cent, the slowest year-to-date period for dealmaking by number of deals since 2003. This means fewer but larger deals have been driving activity so far this year.
"There have been several transformational deals and companies have made some bold and aggressive moves. I'm hopeful that we'll see more of this in 2014.", said Hernan Cristerna, co-head of global M&A at JP Morgan.
"We've seen something of a return of animal spirits."
Comcast Corp trumped Charter Communications with a bid valuing Time Warner Cable at $70.6 billion in enterprise value, the largest transaction in the works since January.
Earlier this year, Ireland-based Actavis. the world's second-largest generic drugmaker, spent $23.8 billion to buy U.S. specialty pharmaceuticals firm Forest Laboratories, its largest acquisition ever.
Facebook also made its boldest M&A move, paying $19.4 billion for its acquisition to grab mobile messaging services firm Whatsapp.
While the U.S. continues to stage most of the M&A action with 51 per cent of the market by value of deals so far this year, Europe and Asia-Pacific are gradually catching up with 24 per cent and 16 per cent of the market. Asia-Pacific had the strongest start of the year on record with announced deals worth $113 billion and 1,751 transaction, according to Thomson Reuters data.
M&A activity in France rose by 673 per cent, boosted by SFR and L'Oreal, two of the biggest deals so far this year.
Morgan Stanley moved into the top position for worldwide M&A advisors during the first quarter, boosted by its role advising Japan's drinks firm Suntory on its $16 billion acquisition of U.S. bourbon maker Jim Beam.
"We are starting to see a slow but steady growth in large deals which implies an increase in confidence.", said Henrik Aslaksen, Global Head of M&A at Deutsche Bank.
"These have a big impact on the market but can skew the true picture. There is no M&A surge yet.," he said, comparing current activity to levels before the global financial crisis.
Deals between 1 billion and 5 billion dollars, which usually constitute the sweet spot and are a barometer for the health of the M&A market, are up 17.5 per cent with 91 transactions so far this year.
"The pipeline at the moment looks healthier than the number of deals being announced, which means getting deals done remains difficult," said Jonathan Rowley, co-head of M&A in Europe, Middle East and Africa at UBS.
More generally, high valuations in the equity market and regulatory risk continue to hold back a stronger uptick in M&A activity, which is still down 17 per cent compared to the first quarter of 2007 when M&A peaked before the crisis, according to TR data.
"The number one hurdle is valuation as the pricing of assets is reasonably full and makes it difficult for bidders to pay a premium to the share price," said Rowley.
Regulatory risk is especially threatening Telecoms, Media and Technology (TMT), the most active sectors for M&A at the moment with a combined 39 per cent market share according to TR data, as anti-trust watchdogs around the world seek to protect customers against potential cartels.
AT&T's blocked acquisition of Deutsche Telekom's U.S. unit by the U.S. competition authority is still clouding prospects of greater consolidation in the U.S. telecom market. In Europe, the European Commission's verdict in May over Hutchison's acquisition of O2 Ireland and Telefonica's move to buy E-Plus from KPN in Germany is likely to set the mood for in-market consolidation in the industry.
"The challenge for M&A generally is that deals have such a long gestation period and it only takes one bump in the road to slow things down.", said Greg Lemkau, co-head of global M&A at Goldman Sachs.
"But while there will always be geopolitical or macro risks, the risk that is more acute to M&A right now is the regulatory environment."
With the main ingredients for M&A now in place - cheap funding, cash-rich corporates, a relatively stable macroeconomic environment and strong equity market -, those having the guts to complement organic growth through acquisitions have so far been rewarded on average.
"It's an opportune time for CEOs to think about their ‘dream deal'", said Lemkau.
Another encouraging sign is that most acquirers of the biggest transactions so far this year saw their share price rise on the back of their deals, except Facebook.
"Immediate stock price reaction is something people are focused on, perhaps overly so, but it does influence the psyche of boards and CEOs. I don't think this recent wave of positive stock price reaction is driving companies to do deals solely for that reason, but it has reduced one of the key anxieties of an acquirer," said Lemkau.
Finally, activist investors targeting underperforming companies are expected by bankers to aim at more firms in the United States and even in Europe following recent successes.
Billionaire activist investor Carl Icahn pocketed $600 million earlier this year after his successful push within Forest Laboratories to sell to Actavis.
Recent companies targeted by activist investors include UK retailer Morrisons, UK transport companies Firstgroup, Swiss bank UBS, US computer network equipment Juniper Networks, eBay, Abercrombie and several oil & gas majors.
While importing the activist model from the United States to Europe is unlikely to bring the same results because boards and executives are more closely aligned in Europe, targeted activism handled behind closed-doors could well lead to more M&A.
"Activist investors and funds are increasingly targeting Europe; obviously, they are adapting their approach to the European corporate landscape," said Yoel Zaoui, co-founder of Zaoui & Co advisory boutique, who recently advised L'Oreal and Peugeot alongside his brother Michael on two of the largest transactions in Europe since the beginning of the year.-Reuters