M&A drops as Washington flexes muscle
THE value of announced mergers and acquisitions (M&A) worldwide dropped by a third in the second quarter of 2016 as a wave of transactions were abandoned in the wake of concerns over regulatory and tax risks, and national security.
While 2015 was a record year for M&A, 2016 is shaping up to be a record year for “broken” deals as the US flexes its antitrust muscle and seeks to crack down on deals that aid tax avoidance or risk harming national security.
Such upsets have caused company executives to think twice before contemplating complex deals that could attract government scrutiny.
Coupled with market volatility triggered by Britain’s vote to leave the EU, this has dented some of the confidence required by corporate boards to approve deals.
“This year companies have been reluctant to take on meaningful regulatory or tax risk or to pursue unsolicited transactions to the same extent that many companies did last year,” said Gary Posternack, global head of M&A at Barclays.
“The fact that a number of those deals were not ultimately successful has undoubtedly had an impact.”
The biggest deal of 2016, US drug maker Pfizer’s $160bn agreement to acquire Dublin-based Botox maker Allergan, was abandoned in April after the US treasury introduced new rules to curb so-called inversions, which are used by companies to lower their bills by redomiciling overseas.
US oilfield services providers Halliburton and Baker Hughes in June terminated their $38bn merger deal after opposition from US and European antitrust regulators.
In February, Philips cancelled a planned $2.8bn sale of its lighting components unit to a consortium led by China’s GO Scale Capital after the US’s Committee on Foreign Investment, which scrutinises deals on national security grounds, objected. Such moves affected new deal making.
Announced global M&A deals reached $839bn in the second quarter, down 32.5% from a year ago but up 14.2% from the first quarter of 2016, according to Thomson Reuters data.
The second quarter’s biggest deal was German chemicals and life sciences company Bayer’s $62bn offer for US seeds company Monsanto. The two companies have yet to successfully negotiate a deal.
Other deals this quarter included Abbott Laboratories’ $30.5bn takeover of US medical products maker St Jude Medical and Microsoft’s $26.2bn agreement to acquire US professional social media platform LinkedIn.
Weighing on M&A has been the recent negative reaction that acquirers have seen in their stock price following a deal announcement. This may be partly due to companies paying more on average to buy companies in 2016 than they did in 2015.
After declining to 25% in 2015, their lowest level since 2006, bid premiums increased to 34% in 2016, modestly above the long-term average of 33%, according to a research note last week by Goldman Sachs analysts.
“It’s too premature to say if the Brexit decision will cause any slowdown in global M&A activity,” said Matt McClure, Goldman’s co-head of M&A in the Americas.
“The key drivers of a healthy dealmaking environment remain: the need to supplement limited organic growth with M&A, the opportunity to improve margins by realising synergies and the availability of low-cost capital to finance acquisitions.”
Deal making in Britain, which accounts for 7% of global M&A volume, has suffered, with M&A announcements down 85% year on year in the second quarter.
“Brexit is likely to have an impact on M&A going forward,” said Adrian Mee, Bank of America’s co-head of global M&A. “It has increased market volatility and negatively impacted the global economic outlook.”
He added: “Ongoing uncertainty will inevitably lead to a more cautious approach to M&A for the rest of the year.”
European M&A deals were down 41% in the second quarter to $147.3bn. The US, the world’s biggest M&A market, was down 23% to $421.8bn.
Chinese companies have continued to be a major driver of deal-making activity. China’s outbound crossborder M&A has totalled $121.1bn so far in 2016, already surpassing the full-year record of $111.5bn set in 2015.