2015 – the best year ever in mergers and acquisitions activity

Last year was the best ever in completed mergers and acquisitions activity, meaning a record amount of companies partly or significantly changed their risk profiles. This activity was fuelled by just a few sources.

Low interest rates boosted global mergers and acquisitions (M&A) in 2015

The year was the best ever in terms of M&A activity with a total volume of ca. USD 5 100 billion globally i.e. up 33% from 2014 and surpassing 2007 by 22% or USD 910 billion.

Global M&A at all-time-high in 2015 (FX rate for USD/NOK used is 8.00)

Henning M&A 1

The largest deal was the USD 160 billion merge between Pfizer and Allergan plc. Despite an extra hectic corporate action year, hedge funds and event driven portfolio managers had a poor year. Event driven strategies in USA in 2015 on average performed -2.29% vs 1.37% for the S&P 500 index (both measured in USD). 2015 as an active M&A year was correctly anticipated by many up front however the actual outcomes from many significant events surprised many. A significant part of the hedge fund industry make big bets on relatively few companies, because of the intense amount of research involved.

The big problem in 2015 was that many of the stocks that were widely held by event-driven funds turned out be losers, including drug company Valeant Pharmaceuticals, which plunged more than 55 percent after short-sellers and lawmakers raised questions about its accounting, pricing practices, and the tactics it used to get insurers to pay for certain drugs. Another popular bet for event-driven funds was Yahoo, whose shares have fallen by about a third this year after the company scrapped its efforts to spin off its stake in Chinese e-commerce giant Alibaba, because of concerns that shareholders would face a huge tax bill.


2016 then? -the trend didn’t continue:
While 2015 was a record year for M&A, 2016 is so far looking to be a year of broken deals instead.


Worldwide the value of announced mergers and acquisitions worldwide has dropped 25% compared to the ytd figures at the same time last year. This is mainly a result of concerns over regulatory risks, tax risks or national security. Mainly (but not only) the United States flexes its antitrust muscle and seeks to crack down on deals that aid tax avoidance.

Henning M&A 2

These 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 European Union on June 23, this has dented some of the confidence required by corporate boards to approve deals.

According to head of M&As at Barclay, “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. The fact that a number of those deals were not ultimately successful has undoubtedly had an impact,”

Last year’s biggest deal, U.S. drug maker Pfizer’s $160 billion agreement to acquire Dublin-based Botox maker Allergan was abandoned last April after the U.S. Treasury introduced new rules to curb so-called inversions that are used by companies to lower their bills by redomiciling overseas.

U.S. oilfield services providers Halliburton  and Baker Hughes last month terminated their $38 billion merger deal after opposition from U.S. and European antitrust regulators.

In February, Koninklijke Philips NV canceled a planned $2.8 billion sale of its lighting-components unit to a consortium led by China’s GO Scale Capital after the Committee on Foreign Investment in the United States, which scrutinizes deals on national security grounds, objected.

Such actions no doubt affect new dealmaking.

The second quarter’s biggest deal was German chemicals and life sciences company Bayer’s $62 billion offer for U.S. seeds company Monsanto. The two companies have yet to successfully negotiate a deal.

Other deals this quarter included Abbott Laboratories’ $30.5 billion takeover of U.S. medical products maker St Jude Medical and Microsoft’s $26.2 billion agreement to acquire U.S. 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 this year than they did last year.

After declining to 25% in 2015, their lowest level since 2006, bid premiums increased to 34% this year, modestly above the long-term average of 33%, according to a research note in June by Goldman Sachs Group analysts.

“It’s too premature to say if the Brexit decision will cause any slowdown in global M&A activity. 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 realizing synergies, and the availability of low-cost capital to finance acquisitions,” said Matt McClure, Goldman’s co-head of M&A in the Americas.

Brexit consequences?

Britain accounts for 7.0% of global M&A volume, and dealmaking 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. It has increased market volatility and negatively impacted the global economic outlook. Ongoing uncertainty will inevitably lead to a more cautious approach to M&A for the rest of the year,” said Adrian Mee, Bank of America Corp’s co-head of global M&A.

Not only the rest of the year, probably. When real outcomes of negotiations are implemented the new post EU days really sink in.

EU, USA and Asia/China:

European M&A deals are down 31% in the ytd compared to 2015 quarter to $592 billion. The United States, the world’s biggest M&A market, was also down 25% to $1453 billion according to Bloomberg.

Some market insiders worry that recent volatility, headline-induced uncertainty and macro headwinds may create a challenging environment for global deal flow. U.S. focused M&A is by some though expected to remain relatively strong.

Chinese companies have continued to be a major driver of dealmaking activity. China outbound cross-border M&A totaled $121.1 billion so far this year, already surpassing the full year record of $111.5 billion set last year.

Henning Varner, Risk Manager, SKAGEN Funds