Forecast Of Global Mergers & Acquisitions Activity Through 3Q16 by Intralinks
Intralinks’ forecast of Thomson Reuters’ future reported volume of announced deals for the next two quarters
The Intralinks Deal Flow Predictor has been independently verified as an accurate predictor of future changes in the global volume (number) of announced M&A transactions, as reported by Thomson Reuters. Quarter-over-quarter (QoQ) percentage changes in the Intralinks Deal Flow Predictor are typically reflected (on average) six months later in announced deal volumes. The Thomson Reuters data on announced deal volumes for the past four quarters has been adjusted by Intralinks for expected subsequent changes in reported announced deal volumes.
Forecast Of Global Mergers & Acquisitions Activity Through 3Q16 – Introduction
Global early-stage deal activity in Q1 2016 decreased by 0.8 percent year-over-year (YoY1), a sharp reversal from the 7.9 percent growth seen in Q4 2015. This was the first quarter since Q3 2009 that global early-stage mergers & acquisitions activity has shown a YoY decline. While the global headline figure appears to indicate a stalling of dealmaking activity in Q1 2016, there is a remarkable division when looking at the four global regions. In two regions – Asia Pacific (APAC) and Europe, the Middle East & Africa (EMEA) – early-stage mergers & acquisitions activity grew by 9.7 percent and 7.5 percent in Q1 2016, respectively, whereas in Latin America (LATAM) and North America (NA) it declined by 8.1 percent and 9.3 percent, respectively.
In NA, we believe that a combination of factors such as a slowing US economy, declining business confidence, the impact of the December 2015 decision by the US Federal Reserve (Fed) to raise the target range for its key interest rate by 0.25 percentage points (the first increase since June 2006), expected weakness in reported Q1 earnings of US companies and concerns over a deteriorating outlook for global economic growth, have weakened dealmakers’ confidence in initiating M&A transactions. The tight race for the US presidential nomination and uncertainty over the outcome of the election itself, with several of the leading candidates adopting protectionist rhetoric, has also probably contributed to the decline in mergers & acquisitions activity in NA, as dealmakers adopt a risk-off attitude.
In LATAM, the severe economic deterioration in Brazil, the continent’s largest economy, resulting mainly from the slump in commodity and oil prices, combined with a growing political crisis precipitated by the investigation into corruption at state-owned oil company Petrobras, and moves to impeach President Dilma Rousseff, seem to have caused an abrupt halt in mergers & acquisitions activity in Q1 2016 following growth in each of the previous four consecutive quarters.
Meanwhile, in EMEA and APAC dealmaking confidence appears to be holding up well in Q1 2016 with the notable exceptions of Germany and Australia, where early-stage mergers & acquisitions activity declined by 8.4 percent and 22.1 percent, respectively. Both countries have been affected by the economic slowdown in China. Weaker Chinese economic growth has caused decreased demand for Australian export commodities such as coal and iron ore, as well as lower exports of Germanmade finished and capital goods such as machine tools. In the UK, dealmakers appear to be becoming more cautious: while early-stage mergers & acquisitions activity increased by 3 percent, confounding predictions by some commentators that uncertainty ahead of the EU membership referendum in June would lead to an evaporation of mergers & acquisitionsA activity, this was a significantly slower rate of growth than in the previous quarter.
Looking globally at early-stage mergers & acquisitions activity by sector, only the Industrials and Materials sectors showed increases in early-stage deal flow in Q1 2016.
Our key predictions for the next six months
The number of global announced M&A deals in the first nine months of 2016 will be approximately the same as the comparable period in 2015. The mid-point of our forecast is for zero percent growth, with a range between -1.2 percent and +1.2 percent. Compared to last quarter, we are seeing a decline, globally overall, in early-stage mergers & acquisitions activity and the possibility exists that the full year 2016 will see a lower number of announced M&A deals than 2015.
In APAC, announced mergers & acquisitions activity will continue to increase from 2015 levels as dealmakers target acquisitions to benefit from the regions’ fast-growing economies and growing middle class, despite the effects on the region from a slowdown in Chinese economic growth.
Announced mergers & acquisitions activity will remain robust in most of EMEA as recovering economies and quantitative easing measures by the European Central Bank continue to support strong levels of mergers & acquisitions activity. Dealmakers targeting the UK will, however, become more cautious due to uncertainty surrounding the approaching UK EU membership referendum in June and the possibility of a destabilizing “Brexit” decision.
In LATAM, weakened global demand for commodities, low oil prices, collapsing investment and constrained government spending, combined with the uncertainty caused by the growing Brazilian political crisis, will act as a drag on mergers & acquisitions activity.
In NA, dealmaking confidence will weaken and any shocks to the system such as further increases in interest rates, weak US corporate earnings, declines in equity markets and further evidence of slowing economic growth will have a negative impact on mergers & acquisitions activity.
First indications of a global M&A slow down
The latest Intralinks Deal Flow Predictor data shows that global early-stage mergers & acquisitions activity in Q1 2016 decreased by 0.8 percent YoY. Pessimists would argue that this is the first sign of the M&A market cooling down. Dealmakers are experiencing a slow-down of activity, driven primarily by the ever-slowing and increasingly fragile pace of the global economic recovery, exacerbated by weak commodity and oil prices, the impact from a slowing Chinese economy and evidence of weakness in economic activity in emerging markets. That said, the data also shows very significant regional differences on a much more pronounced scale than in recent Intralinks Deal Flow Predictor reports, with EMEA and APAC still showing relatively robust growth in early-stage mergers & acquisitions activity in Q1 2016 compared to equally significant declines in NA and LATAM.
Corporate executives continue to face the same challenge they faced over the course of 2015, namely having to find ways to grow in a weak economic environment with low inflation. At the same time, private equity practitioners face the dual challenge of having to deploy capital and looking for exit opportunities for some of their older portfolio companies. The pressure to continue to do deals in this type of environment can outweigh nervousness over a weaker than expected global economy and the occasional shocks such as economic news from China or equity and bond market jitters.
North America – the Trump effect?
In the US, the Fed’s interest rate rise in December 2015 was received calmly and seemed to have no discernible impact on early-stage mergers & acquisitions activity in Q4 2015. However, as the November 2016 US Presidential election draws closer and Donald Trump’s march toward winning the Republican nomination continues, our latest Intralinks Global M&A Sentiment Survey suggests that dealmakers may be reticent to initiate new transactions out of concern that the US might end up with a President Trump. In fact, early-stage M&A activity in