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Cape Town - Record levels of mergers and acquisitions (M&A) set in 2015 are set to continue in 2016, according to international law firm Allen & Overy’s latest M&A Insight.
According to the report, globally, deal values are up by 22% compared with 2014 to reach an unprecedented total deal value of $4trn, while volumes continue to decline by nearly 13% year-on-year. Approximately one third of all deals in 2015 were cross-border, which is consistent with levels seen in 2014.
In 2015 Asia has overtaken Western Europe as the second most active M&A market to the US for the first time. High levels of activity has been driven by Chinese companies doing outbound acquisitions.
“While deal values in Europe lag those seen in the US market, volumes paint a different picture. Western Europe consistently outperforms the US by deal volume and 2015 was no exception,” said Dirk Meeus, global co-head of corporate at Allen & Overy.
Big brands and technology companies are particularly attractive targets, presenting an opportunity to shift consumer markets and expertise back to China, according to the report. This trend is also underpinned by the government’s focus on diversification.
While strategic deals were the global trend for 2015, the US dominated with the most M&A transactions - over $5bn. The US was involved in 81 (or 62%) of the 131 deals valued at more than $5bn globally. The US closed out the year with two transformational deals, namely the proposed $160bn merger of Pfizer and Allergan, which will be the largest single transaction of 2015, and the planned $130bn merger of DuPont and Dow Chemical.
According to Meeus, global co-head of corporate at Allen & Overy, M&A activity is supported by continued strong economic conditions and the availability of cheap debt and financing.
He said a consistent driver for deals has been the search for cost synergies and efficiencies through consolidation. M&A is also being used as a defence tactic, especially in industries challenged by disruptive forces, such as energy services companies that are under pressure from declining commodity prices. Other drivers include shareholder activism, which continues to be a catalyst for doing M&A, and government privatisation programmes in play around the world.
“Boardroom confidence to do deals seems largely undiminished, cash and financing remain readily available and the economic environment is positive for transactions, however, with volumes being down overall, it will be up to corporates to do more transformational deals to sustain current record levels of M&A,” added Meeus.
In 2015, macro-political and economic events didn’t seem to destabilise the M&A market as much as might have been expected. In his view, this may be a sign that boardroom confidence is very strong, or that companies and markets are more resilient to external factors than pre-crisis.
"It will be interesting to see how M&A markets hold up with an increasing threat of international terrorism, a UK referendum, and imminent US interest rate rises," said Meeus.
"What is more certain is the likelihood of seeing more mid-size M&A in 2016. One of the follow-on effects of a boom in strategic deals is that companies will need to reshape their portfolios and dispose of non-core assets. When they do, PE funds are likely to be a major buyer."
