During the final few days of October alone, five multi-billion dollar transactions took place including TD Ameritrade/Scottrade. Other megadeals in the works are British American Tobacco’s $47 billion offer to assume full control of Reynolds American and the $39 billion coming together of NXP Semiconductors NV and Qualcomm. But the behemoth is AT&T’s $85.4 billion deal for Time Warner, by far the largest announced last month (it accounted for almost half of October’s total value).
According to Bloomberg, along with AT&T/Time Warner and a number of other transactions including CenturyLink’s $34 billion acquisition of Level 3 Communications, as well as General Electric Co.’s deal to combine its oil and gas division with Baker Hughes, October’s deal volumes amounted to about $489 billion. That exceeds the previous record of $471 billion in April 2007.
Bloomberg also calculates that, since January this year, 32 deals valued at more than $10 billion have been agreed. That puts 2016 on course to beat every year since 2007 except for last year, when a stellar 52 transactions of that size or more were announced.
In addition, almost 30 deals announced since the start of 2015 have not yet closed, including Dow Chemical’s $59 billion merger with DuPont, which was pushed back until next year.
And while Donald Trump’s surprise victory over Hillary Clinton to become the new US President could put a temporary halt on the surging M&A market, his election may ultimately result in a further stimulation in deal-making. Although let’s not forget that Trump vowed to block AT&T’s proposed acquisition of Time Warner in the first 100 days of his presidency.
Meanwhile, the UK M&A market is also heating up thanks to weaker Sterling making British businesses look like a bargain although to some extent this is offset by valuations at all time highs. More importantly the availability of cheap debt and huge amounts of private equity firepower from recently raised funds is driving UK deal activity . In a foreseeable low growth economu post-Brexit referendum Panmure Gordon believes that buying growth will become increasingly key to growing business.
In a recent interview with CNBC, Panmure’s head of M&A, Karri Vuori, posited that, while weaker Sterling doesn’t necessarily mean a strong UK economy or better business opportunity, the UK is poised to record a surge in M&A.
He said: “There are three global trends at the moment that are driving this huge uplift in M&A that we’ve seen in the US, but we think that’s going to filter through to the UK partly because of Sterling but really due to these three key reasons.
“One is we’re in a slow growth economy so buying growth has become key to a lot of businesses and that’s where we’re seeing these mega mergers in the US. Two - valuations are remarkably high at the moment so using your equity to buy businesses is a cost-efficient capital-efficient practice albeit you’re paying much higher prices as well. And finally there’s this huge availability of debt. So really it’s a cost of capital issue that’s driving this boom in mergers.”
Nevertheless, why would a company want to buy a UK target where the price tag is discounted because they’re not buying growth?
“Global expansion, empire building,” said Vuori. “If you look at some of the three mega mergers that came out in the US last week there’s three very different rationales in there and frankly only one of them in my mind makes any sense. Look at AT&T and Time Warner, that’s empire building if nothing else. There’s a lot of talk out there about potential anti-trust cases, the politicians are getting all excited about it. But frankly this is vertical integration. Is it going to make any difference to consumers? Probably not. Is it going to get caught up in anti-trust? Probably not. Does it make any commercial sense? Also, probably not. I can’t really see any synergies.”
So far this year, Panmure Gordon has announced 11 M&A deals not least the successful €290.8m sale of GO plc to Tunisie Telecom and £105m sale of Penna Consulting to Adecco.
The outlook for 2017
The outlook for 2017 continues to look strong from a M&A standpoint with no sign of an immediate end to the current debt bonanza and with European PE funds holding over $160bn in dry powder as of June 2016. However, how long this will last will depend on key macro events with the world holding its breath as to what Trump’s policies will actually look like and will the UK head for a ‘hard’ Brexit. In the near term, debt availability will undoubtedly be affected by the outcome of the Italian referendum so hold your breath for the 4th of December.