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Deal making with some surprises left in store

Matthew Toole  Director, Deals Intelligence, Thomson Reuters

Matthew Toole  Director, Deals Intelligence, Thomson Reuters

Following the most prolific annual period for worldwide deal making in history would not be an easy task. In a year that started out with a looming event calendar – a referendum on the EU in the UK and a presidential election in the US – potential economic headwinds were widely expected to affect the pace of merger activity. Those that predicted the top of the M&A cycle last year were technically correct, as the value of deal-making activity declined in all regions and nearly every sector during full year 2016, but the year in deals turned out to be just as unexpected as the results of that looming calendar.

Values decline, but deals see gains

Worldwide deal making totaled $3.7 trillion during 2016, a decrease of 16% compared to full year 2015 and the third-largest annual period for merger activity since records began in 1980. A look back across historical deal cycles illustrates a span of seven or eight years in between deal-making peaks. At the turn of the century, two of the all-time largest quarters for deal making kicked off the modern era of deal making, with records broken following peak years of 2007 and 2015.

The first quarter of 2016 was closely watched for and finished with a 47% decline compared to the fourth quarter of 2015. However, to the surprise of many deal makers, the number of deals fell by just 6%. While the year of the megadeal was assumed to be over, healthy levels of deal activity were occurring in the mid-market across a number of regions and sectors. And while full year deal making registered a double-digit percentage decline from last year’s all-time record value, for the first time ever, the number of announced deals increased in the face of declining deal values.

Deals greater than US$5 billion totaled $1.40 trillion, down 30% compared to a year ago, while deals under US$1 billion totaled $1.24 trillion, a 7% decrease compared to 2015. By number of deals, activity below $500 million increased by 1.1%, while activity over $10 billion decreased 41% compared to a year ago.

Every major region saw year-over-year M&A value declines during 2016, with the US, Asia Pacific and Japan each surpassing 2015 levels, by number of deals. European M&A totaled $756.5 billion, a 13% decrease compared to a year ago and the slowest annual period for M&A in Europe since 2013. Africa/Middle East M&A declined by just 0.8% compared to a year ago, bolstered by the $14.1 billion combination of First Gulf Bank and National Bank of Abu Dhabi in the United Arab Emirates, the third-largest deal on record in the region.

This infographic from Thomson Reuters Deals Intelligence gives a look at worldwide M&A since 1997, M&A by region and deal size, and key figures on M&A by sector.
Source: Thomson Reuters Deals Intelligence. Click to enlarge the infographic.

China buying spree

For the last decade, Chinese buyers have been searching the globe for investments outside of China, generally in Financials or Energy & Power, but ChemChina’s $46.6 billion bid for Swiss chemical giant Syngenta in February paved the way for a diverse set of deals which would go on to shatter the all-time record for outbound China M&A. By year’s end, Chinese buyers would announce deals valued at $221.9 billion, more than double the previous record set in 2015. Deal making in Technology, Media and Industrials would continue throughout the year, ushering in domestic banks such as China CITIC Bank, China International Capital and Industrial & Commercial Bank of China, into the ranks of global advisory work.

Referendum on deal making?

The June EU referendum in the United Kingdom introduced a unique level of uncertainty for UK-related deal making and dampened first-half activity, which fell 55% compared to the first half of 2015 and accounted for just 7% of worldwide deal activity, an all-time low. The surprise results of the vote temporarily shook markets, but within a month Japan’s SoftBank announced a $30.8 billion bid for ARM Holdings, starting a resurgence in UK involvement in M&A activity that would place the fourth quarter among the largest of all time. British American Tobacco’s $57.8 billion offer to buy US rival Reynolds American and 21st Century Fox’s $22.9 billion buyout of a remaining stake in the UK’s Sky Plc pushed second- half deal making to $280.4 billion, more than double first-half levels.

In the face of an election, more records

The post-financial crisis M&A cycle kicked off during the first quarter of 2014 when a wave of consolidation hit the US Pharmaceutical sector, and US companies have been at the forefront of many of the largest deals struck over the past three years. In the face of one of the most contentious US presidential elections in memory and uncertainty over which major party would control the White House or the Congress, US deal making was muted, until October. About three weeks before Election Day, AT&T launched a $107.5 billion bid for Time Warner, pushing October M&A levels to nearly $400 billion, the largest all-time month on record. In fact, five of the year’s top 10 deals were announced in October and all involved a target based in the US.

US inbound cross-border M&A totaled $524.3 billion, a 19% increase by value and an all-time annual record. Nearly 2,500 deals involving a foreign buyer in the US were announced during 2016, a 28% increase compared to a year ago. Buyers in Canada, Germany, the UK and China accounted for nearly two-thirds of US inbound M&A activity in 2016.

Balanced mix of sectors

The year’s phenomenon of declining deal values contrasted with rising deal numbers was most apparent within specific sectors, with global Retail M&A down 28% by value, up 7% by number; Pharmaceutical deal making declining 57% by value, up 7% by number; and Food and Beverage mergers falling 70% by value, up 2% by number.

Overall, deal-making activity in the Energy & Power sector reached $608.0 billion during full year 2016, up 15.4% compared to 2015 levels and accounted for 17% of overall activity. M&A activity in the Technology sector totaled $486.6 billion so far this year, while Materials and Industrials account for 11% and 10% of worldwide merger activity during the year, respectively. Six of the 12 major industry sectors accounted for at least 10% of year-to- date M&A, the most balanced sector breakdown since records began in 1980.

Deals fall apart

Any record year for M&A is usually followed by a spike in withdrawn deals and 2016 was no exception. Deals come under scrutiny from regulators or shareholders, aggressive competitors outmaneuver or savvy bankers mount a major defense strategy. Whatever the reason, failed M&A bids hit $804.8 billion during full year 2016, a 52% increase compared to a year ago and the largest year for failed M&A deals since 2008. Over 1,000 deals were cancelled during the year, including Pfizer’s $191.5 billion offer for Allergan; Honeywell International’s $102.5 billion approach for United Technologies; and Energy Transfer’s $55.9 billion attempted acquisition of Williams Companies.

Withdrawn deals are carefully watched by the deal-making community, as M&A advisors generally only collect a fee when the deal completes. During 2016, fees from completed mergers and acquisitions totaled an estimated $26.7 billion, a decline of 3% compared to a year ago. The top-tier, bulge-bracket firms saw their collective share of M&A fees remain at 48%, on par from full year 2015. Boutique and independent advisory firms cashed in on their industry expertise during 2016, accounting for 34% of overall advisory fees, an all-time high and illustrating the changed advisory landscape since 2000, when boutique advisory firms accounted for 13% of fees and the top-tier advisors accounted for 63%.

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