Total Mergers & Acquisitions Value Eclipses US$1.9 Trillion For 2015 by PitchBook
After A Record Year, The Scene Is Changing, But Plenty Of Drivers Remain
2015 certainly brought forward its fair share of volatility, but the strategic need for mergers & acquisitions continued to propel activity. We witnessed a record in overall transaction value as well as sustained high volume, and although there are concerns regarding the global market and clear cautionary signs across various economies, deal-makers focused on long-term growth remain fairly acquisitive. As the U.S. economy has strengthened, cash reserves have risen, stock prices have moved higher and privately backed companies have become ready to exit. Couple this with the availability of cheap debt and we’ve had an environment with plenty of companies with the means to close transactions and the incentives to do so despite global macro uncertainties—either for reasons of adaptation or sustainability. Further, while we think the business cycle is working steadily through its later stages, mergers & acquisitions won’t necessarily slump during this period. Rather, certain pockets of the market, particularly on a sector-by-sector basis, will feel the pain more than others, and distressed opportunities that can provide ample synergies will emerge.
Since its inception in January 2012, the long book of the Voss Value Fund, Voss Capital's flagship offering, has substantially outperformed the market. The long/short equity fund has turned every $1 invested into an estimated $13.37. Over the same time frame, every $1 invested in the S&P 500 has become $3.66. Q1 2021 hedge fund Read More
Mega-deals will face the biggest burden going forward as the ability to adequately fund them in a landscape that has witnessed a significant slowdown across high-yield has produced a lending environment that may not be able to accommodate those deals as they once could. The regulatory environment plays a big role in that regard, and thus we witnessed a slowdown in the total amount of value moving through that particular ramp as deals have to get restructured in order to close. With this, multiples for certain deals may come down, but expect to see deal-makers needing to put cash to work continue to look to grow via acquisitions.
Mergers & Acquisitions – Record Value, Even As Activity Softens
While the global market environment experienced a volatile 2015, deal-makers remained active at a record-setting pace, completing more than $1.95 trillion worth of mergers & acquisitions transactions across North America and Europe. More impressively, that figure represents a year-over-year (YoY) increase of over 21%, even though the yearly total of 19,686 deals was a decline of near 2% from 2014. While last year’s total transaction count still comes in just behind the record 20,080 deals completed in 2014, the slip in volume can be attributed primarily to 4Q, which saw deal flow tumble by 21.5% following a decently active third quarter.
4Q 2015 saw just under $471 billion in mergers & acquisitions deal value close across 4,099 transactions, only a 1.7% drop in overall transaction value, but a rather significant decline in quarter-over- quarter (QoQ) count relative to the 5,221 in 3Q, which we think is attributable to many of the same factors we’ve seen affect the private equity landscape.
Public markets and private valuations have grown at an impressive clip over the last half decade or so, which, through the end of last year, undoubtedly brought forward a plethora of positive factors underpinning the mergers & acquisitions market. One primary driver has been the rise of global equities, leading the way to an additional financing resource for corporates to use as a valuable currency when looking to lure strategic targets. Global market sentiment continued to rise as well, and with the actions of central bankers producing historically cheap debt financing options, the ability to structure deals in an attractive way offered deal-makers flexible and favorable ways to fund transactions. In addition, businesses themselves grew, increasing cash flows and consequently growing stockpiles of cash that strategic acquirers needed to put to work. For some, much of that cash and cheap debt was used to fund bottom-line EPS growth and to appease shareholders via increased dividends and rather excessive stock buyback programs, yet much was also put to work in mergers & acquisitions as many enterprises then possessed the resources to pay inflated multiples for the right synergies.
Yet, in the wake of these positive outcomes, the last 12 months have seen a market begin to show clear signs that we are late in the business cycle. Corporate earnings are thinning, and if 4Q 2015 earnings results come in similar to what we saw in 3Q and 2Q of last year, there will have been three straight quarters of negative earnings performance—an outcome that seems fairly realistic given the growth concerns and economic developments we saw in the back half of 2015. Further, investors are paying very close attention to the actions and financials of the public equities they’re holding, in turn forcing executives to think closely about all strategic initiatives in order to protect their businesses’ stocks and paper from unnecessary, non-systemic risks in the equity and corporate bond markets.
With that, we see a couple major concerns that deal-makers have been facing and will continue to face moving forward. The first is the fear of overpaying in a market that may see the cycle turn. We think top-tier assets acquired by both strategic mergers & acquisitions and buyers backed by private equity firms have made their way to market. That is not to say that no quality companies remain in the market, but deal-makers will need to be much more selective to vet investments at this point in the cycle to avoid the risk of acquiring companies that may produce serious complications if their core businesses were to plateau to some extent. Further, there are always additional costs of reaping and squeezing synergies out of mergers & acquisitions deals that may include severance-related charges and spend associated with streamlining operations, among various other corporate restructuring costs. While many of these cash drains can come in the form of one-time charges, at the higher end, executives of publicly traded companies need to weigh the negative implications of how their shareholders may react to such initiatives, which will typically have negative implications on bottom lines for a few quarters until acquired targets are fully integrated.
A positive ripple effect of this, however, is the willingness of strategic acquirers to pay premiums for top-quality businesses in certain circumstances. If sourced deals can prove to be accretive to EPS in a reasonable time-frame, help position companies in new strategic markets and sectors, or aid revenue growth in a more cost-effective way relative to organic growth initiatives, corporates will continue to pay heightened multiples. Further, the same also applies to lenders, especially across the middle market. As the fixed-income desks of larger commercial banks struggled to deal with the previous lack of volatility, and, subsequently, continue to have difficulty navigating the more recent spike in volatility, regulatory requirements such as Basel III have induced significant pressure on their lending, and direct lenders have been able to step in to help fund acquisitions. We’ve seen this play out in both the percentage of debt we’ve seen tacked on to recent deals, in lieu of the crunch we’ve seen across high yield, as well as in valuation multiples, as they’ve crept higher despite declining volume. In 4Q 2015, we saw valuation-to-EBITDA multiples come in at 9.5x, the second-highest figure we’ve seen since 3Q 2011. Further, the debt proportion of deals completed during the final quarter of 2015 was 58%, a significant jump compared to the 49.7% figure clocked in 3Q and exceeding any other quarter of the year. This reinforces the point that deal-makers are still willing to pay premiums for certain transactions, as well as the availability of debt higher up in the quality spectrum.