Will the M&A boom continue?
The global mergers and acquisitions (M&A) market is enjoying a boom – of that there can be little doubt.
In the first half of this year global M&A deals reached a record $2.5trn (£1.9trn) in value, according to Thompson Reuters, a rise of 65 per cent on a year earlier. Much of this has been underpinned by the generous use of debt but also a lot of spare cash flow.
There have been some eye-catching mega deals already this year. US health insurer Cigna Corp’s $67bn acquisition of pharmacy chain Express Scripts in the first quarter was one. But it was soon eclipsed by the $85bn acquisition of Time Warner by AT&T in the second quarter.
However, sceptics have questioned how long such a wave of mega deals can last. There are fears the current period of global economic and stock market expansion is slowing and that we have reached a point where they are vulnerable to an economic shock. Yet Wall Street has just celebrated the longest Bull Run in its history and deal-making continues apace.
That’s not to say the global economy doesn’t face threats. In the UK Brexit and, more broadly, moves towards protectionism and the threat of an international trade war loom large.
Despite this we see strong evidence that M&A will continue to flourish. Global economic growth remains strong, interest rates supportive and central bank policymakers reluctant to accelerate any return to normal monetary policy conditions.
There also remains plenty of appetite for acquisitions, corporate cash reserves are full to bursting boosted by US tax cuts – one recent estimate suggested there was more than $2trn in cash held by US corporates - and debt remains plentiful.
Many recent M&A deals suggest companies are not only buying innovation but also looking to establish themselves in markets by targeting geographic expansion. There were more than 9,000 cross-border deals last year with a value of more than $1trn. And it’s not just the headline grabbing deals. Last year, saw the number of mid-market deals (valued between $10m and $300m) grow by 14 per cent.
Divestments are also helping to drive global M&A. General Electric Co recently announced a sweeping breakup plan to divest $20bn worth of assets from its healthcare unit and its stake in oil-services company Baker Hughes.
Some of these divestments are being driven by greater levels of shareholder activism. In the UK the Investment Association found shareholder revolts at FTSE firms had jumped by 25 per cent the last year. Another recent business survey also found shareholder activism on the rise with some four-fifths of respondents saying they expected it to increase M&A activity in the coming 12 months. The trend for divestments has been particularly noticeable in Europe where activity reached almost $170bn last year.
Cash-rich private equity firms are willing buyers. US buyout group Advent recently agreed to buy General Electric’s distributed power unit for $3.25bn, while KKR & Co won a deal to buy the French telecom tower operations of Altice. There is currently $1trn of “dry powder” waiting to be put to work by private equity funds, while last year deal values involving private equity houses totalled close to $500 bn.
Debt is also playing large part in driving the market. Blackstone’s acquisition of a 55 per cent stake in Reuter’s data unit for $17bn was funded by a bumper $13bn debt package. Meanwhile, the value of covenant lite loans – a key feature of the current M&A boom – issued in Europe last year more than doubled to €78.6bn (£68.8bn).
The two busiest sectors have been technology and healthcare, a trend only seen accelerating. M&A in the TMT (Technology, Media and Telecommunications) industry has seen the greatest level of activity, up almost 90 per cent year-on-year. Part of this is being driven by tech giants like Google and Amazon shifting their growth strategies to move beyond their core products.
But more established companies are moving beyond their core products too and buying innovation to help them adapt to a rapidly changing, technologically driven environment. Jaguar Land Rover’s recent investment in US taxi-hailing app Lyft was one such example. Another is Toyota’s $500m investment in Uber, expanding its deal with the taxi hailing app to develop self-driving cars.
Even in the UK, M&A activity in Britain reached an 18 year high in the first quarter, according to Reuters, at $275bn. And cross-border deals between the UK and Europe more than doubled the first six months of 2017.
Some of this activity could be restrained by two factors: Brexit or a Jeremy Corbyn-led Labour government. While Brexit is currently creating uncertainty and could even be responsible for the boom in cross border UK – Europe deals the greater clarity markets receive the more likely it is deal making will continue.
Meanwhile, there are naturally fears in the mid-market about what Labour plans to drastically reform entrepreneurs’ tax relief - which currently allows most entrepreneurs to sell their business and pay no more than 10 per cent capital gains tax on the sale - might mean for M&A deals. Indeed, in August a think tank called for the relief to be scrapped, with any savings generated given back to the NHS.
What this idea did not factor in however is how much the UK could be deprived of through the loss of serial entrepreneurs. Given SMEs make up around 99% of all businesses in the country and employ more than 26m people, discouraging the entrepreneurs behind them from setting up shop in the UK would rob the country of their critical and important contribution to the economy.
How much credence those fears should be given, however, may perhaps be linked to Labour’s chances of successfully winning an election in the immediate future.
Ultimately, while there are risk factors facing the global M&A market the factors sustaining deal momentum are somewhat greater. The boom in deal making is far from over.
Joe Stelzer, Managing Partner at Cavendish