As 2015, the year of the mega deal, came to an end, it was clear that following the most prolific annual period for worldwide deal making in history would not be an easy task.
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.
— Matthew Toole (@mgtoole) December 30, 2016
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 in following peak years of 2007 and 2015.
While the year of the “mega-deal” 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.
2016 Key Deal Making Facts & Figures
- The first quarter of 2016 was closely watched for and finished with decline of 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%.
- Every major region saw year-over-year M&A value declines during 2016
- The United States, Asia Pacific and Japan surpassed 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.
- Deals greater than US$5 billion totaled $1.40 trillion, down 30% compared to a year ago
- 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.
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 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 U.S. -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.
But while signs seemed to suggest the landscape may be changing, caution is needed.
Some deals may not always reflect the story it seems they are telling, a topic discussed in our most recent “What’s Driving Deal Making” webcast.
“Those [deals] don’t tell you a story about growing confidence in Britain, it just tells you there are a couple of big situations that got resolved in that time… Political forces are going to be huge with Brexit.
The banks even have to figure out even where the people will be based. It won’t affect M&A activity necessarily, but factors will impact CEO confidence,” explained Reuters Breakingviews’ Goldfarb.
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 a consolidation hit the U.S. 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 U.S. presidential elections in memory and uncertainty over which major party would control the White House or the Congress, U.S. deal making was muted, until October.
— Deals Intelligence (@Dealintel) January 19, 2017
With just 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 United States.
But how will the ever changing political landscape impact deal making? How will the “Donald Trump factor” change deal making, especially when it comes to the mega deal – which powered so much volume in recent years?
During the Q4 Review webcast, Goldfarb flagged the new President’s outlook, very focused on jobs, arguably one of the main reasons he got elected, could be a factor to look out for when considering this question, especially as so much of M&A over the past few years has been about synergies, thus involving job cuts.
Goldfarb explained the challenge CEOs are wrestling with now is how to announce a potential major merger without playing up the idea that to make this merger work job cuts will take place. “Do they risk being called out by the President of the United States?” he questioned. The message and strategy when announcing certain deals may change.
It's finally happening – Fiat Chrysler just announced plans to invest $1BILLION in Michigan and Ohio plants, adding 2000 jobs. This after…
— Donald J. Trump (@realDonaldTrump) January 9, 2017
Potentially a move from the mega deal to those conventionally known as transformational could take place.
Moving into a business line that doesn’t overlap with your existing one, lends itself less to job cuts, but just how effective are those deals?
Finding new revenues streams by pushing two companies together is much harder it can be questionable in terms of shareholder value whereas it is much easier to see where cost saving might result as two similar companies merge, explains Goldfarb.
Democratic senators want AT&T to detail Time Warner deal benefits https://t.co/gQTQtZZP6M
— Reuters Top News (@Reuters) January 25, 2017
2016 Key Deal Making Facts & Figures
- United States 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 United States were announced during 2016, a 28% increase compared to a year ago.
- Buyers in Canada, Germany, the United Kingdom and China accounted for nearly two-thirds of US inbound M&A activity in 2016.
Deals fall apart
Any record year for mergers & acquisitions is usually followed by a spike in withdrawn deals and 2016 was no exception.
Deals come under scrutiny from regulators or shareholders, aggressive competitors out maneuver or savvy bankers mount a major defense strategy.
Withdrawn deals are carefully watched by the deal making community, as M&A advisors generally only collect a fee when the deal completes.
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 Internationals’ $102.5 billion approach for United Technologies and Energy Transfer’s $55.9 billion acquisition of The Williams Companies.
In our recent “What is Driving Deal Making, Q4 2016 Review” Matthew Toole, Head of Deals Intelligence and Jeff Goldfarb, US Editor, Reuters Breakingviews discussed the ins and outs of deal making in 2016, the surprises, the ongoing trends and just how much change we can expects in this space as macroeconomic and political forces impact the scene.
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