Global merger and acquisition activity in 2015 surpassed $5 trillion for the first time ever, according to Dealogic data. The bumper year shows the highest level since before the credit crisis, when 2007 posted $4.6 trillion worth of deals.
Healthcare was the leading sector, with the $160 billion Pfizer/Allergan (PFE) merger concluding the year in style.
Hot on its heels, the news earlier this month that Dublin-based Shire (SHP) had agreed terms for a $32 billion takeover of rare disease treatment specialist Baxalta (BXLT) signalled the continuation of the M&A bull run into 2016, certainly in the pharmaceuticals sector.
Elsewhere, the dramatic end of the commodity supercycle hit hard and the falling oil price continues to keep the thumbscrews on the energy sector – this led to the rise of the megamerger.
Last year Deloitte reported $534.8 billion worth of deals in the natural resources sector alone, including 10 “mega deals” worth more than $10 billion – more than twice the previous year. Deal volumes however, or the number of individual deals, had declined for the fourth year in a row.
Not Just the Megamergers
‘Megamergers’ aside, opportunities abound for bolt-ons and consolidation lower down the market cap spectrum, with activity apparently fuelled by a number of factors.
Iain Macmillan, global head of M&A at Deloitte, says: “Concerns over global growth are back, along with a divergence in economic and monetary policies. Also, variations in corporate performance and deal price-to-earnings ratios between the US and Europe are creating more opportunities. We expect these conditions to define deal-making in 2016.”
How Can Investors Benefit?
M&A is a theme played in different ways. One long-term beneficiary of Shire’s acquisitive nature is Mark Boucher, manager of the triple-starred Smith & Williamson UK Equity Growth fund.
With the stock taking a top-two position in his fund, Boucher claims these types of strategic consolidators, like outsourcing and distribution giant Bunzl and plastic packaging company RPC, hold firm places in the portfolio.
Since refocusing its acquisition strategy in 2010, he says Shire has bolstered its overall valuation through a series of successful deals - an exception being the aborted $50 billion-plus takeover by AbbVie in 2014, which pushed down its share price by more than 20%.
“[Shire] management has done a good job of acquiring companies. I think this latest once seemed to make the market nervous because it was of a size they had not done before and there are competition concerns over one of their main drugs, so many have not given Shire the benefit of the doubt.”
Boucher says the strong deal values seen last year are unsurprising, calling this a “classic” point in the cycle to expect more M&A, certainly in value terms.
“We are seeing recovery in earnings, companies are doing cost-cutting, we are in a better environment and now that is making it tougher to try and grow revenues organically.”
One way for corporates to keep their profit line moving forward is for amalgamating businesses and stripping out costs, he says: “Hopefully you would see some revenue synergies as well.”
Deloitte analysis suggests companies are striving for annualised cost synergies representing around 3-4% of the transaction value. According to its latest M&A Index Q4 2015: “If all announced cost synergies are realised and sustained, they could add an estimated $1.5-1.9 trillion to the value of these companies. Therefore delivering these synergies will be high on boardroom agendas.”
Boucher is surprised the megadeals seem to dominate, and suggests the US tax inversion – where US companies domicile themselves overseas to gain tax advantages - was behind the majority. He adds that it was a major driver behind car battery ventilation equipment manufacturer Johnson Controls’ (JCI) reported bid for fire protection and security company Tyco International (TYC) earlier this week.
In spite of the record year for value, deal volumes tailed off in the second half of last year, according to Deloitte, which also revealed a significant rise in cross-border deals.
The report said more than $1 trillion of international deals were completed, with more than a third populating the increasing deal corridor between North America and Europe, with links between Asia – namely China and Japan – expected to strengthen throughout 2016.
M&A Picks Up as Economic Outlook Improves
Mike Della Vedova runs the T. Rowe Price European High Yield Bond fund. He believes given the more sustainable environment, the types of M&A being seen across Europe are taking on rather new characteristics.
Companies engaging in M&A are not as highly leveraged than they once were, low interest rates mean cheaper borrowing costs, and balance sheets are in better shape.
He says: “We are seeing more trade M&A, where companies buy others in the same industry. There can be opportunities to take advantage of these deals, but it is vital to do the work and understand each one on a case-by-case basis.”
Della Vedova spies a particularly good example in multinational telecoms company Altice (ATC), which has grown rapidly in the past three years as a result of “its dynamic acquisition strategy”.
Altice was behind the acquisitions of Numericable SFR and Portugal Telecom, while it has also recently moved into the US.
“Last year it looked to raise the biggest transaction our market had seen at $16.7 billion,” he says. “We have had a number of positive meetings with senior management and the founder, which has really helped us understand the value they see in the business over the long term and the real core of its strategy going forward.”
