Three quarters of the way into 2016, North American and European mergers & acquisitions value stands at just under $1.7 trillion. After a staggering $866 million average transaction size in 2Q, the median hit a high of $210 million in the subsequent quarter. It’s clear blockbuster deals are still driving overall value, but more and more companies are commanding outsized multiples even as transaction counts decline.
The Year Of The Mega-Deal
While completed transaction counts have slid considerably, the mergers & acquisitions market as a whole has remained strong on a historical basis and total deal value has remained impressive. Through the third quarter of the year we’ve already seen nearly $1.7 trillion in M&A value, amounting to a roughly 10% jump over the same period last year. Further, median deal sizes climbed substantially last quarter and as both strategic players and private equity firms alike hold ample cash piles ready to deploy, the deal markets continue to see significant competition for quality targets looking to change hands.
David Einhorn's Greenlight Capital returned -2.9% in the second quarter of 2021 compared to 8.5% for the S&P 500. According to a copy of the fund's letter, which ValueWalk has reviewed, longs contributed 5.2% in the quarter while short positions detracted 4.6%. Q2 2021 hedge fund letters, conferences and more Macro positions detracted 3.3% from Read More
Whatever the topic, financial news pieces have continuously pointed to an uncertain economic landscape as a primary cause of some sort of deterioration in markets or business performance. While that contention is valid in many cases, that same uncertainty can be a driving force of M&A as certain industries experience a heightened need for consolidation. We’ve seen that play out in a big way this year as industry stalwarts look to solidify their competitive positions—just three quarters into 2016, a record amount of deals have closed at an enterprise value of over $10 billion.
Throughout this report we’ll dive deeper into 2016 deal activity, provide M&A spotlights on the B2C, IT and energy sectors, and offer commentary surrounding PE’s role in the current M&A landscape. We hope this report helps inform your decision-making process and as always, feel free to contact us at [email protected]
Larger Corporate Acquisitions Buttress Deal Value
Global mergers & acquisitions seemed to have peaked in 2015 when we saw record deal flow, higher valuations and companies looking to scratch out a little bit of growth in any way they could. Since then, the number of deals coming to market has slowed considerably while the value of those deals continues to grow. In the face of macroeconomic and political uncertainty, but armed with plenty of excess cash on the balance sheet, corporate acquirers are chasing larger companies, paying higher multiples, and putting up more equity to complete transactions.
Over 3,000 deals were completed in 3Q 2016, representing a stark decrease from previous quarters. Typically, our datasets tend to inch higher as we continue to collect retrospective data, yet the trend is still clear: Deal flow has slowed considerably each of the last three quarters. As the mergers & acquisitions cycle continues to wind down, there are fewer quality companies coming to market, but the ones that do show up tend to be sought after more and are commanding outsized multiples. Thus, aggregate deal value remains high despite the slowdown. While the value of M&A deals decreased quarter over quarter (QoQ) in 3Q, the first three quarters combined have seen $1.7 trillion in activity, which represents a 9.7% increase over the same period last year. This value is increasingly made up of transactions with EVs of over $1 billion, which accounted for 81% of deal value in 3Q 2016.
To date, 2016 has been the year of the mega-deal. Led by InBev’s $113 billion acquisition of SABMiller and Charter Communications’ $79 billion acquisition of Time Warner Cable, a total of 31 deals with an EV of at least $10 billion have closed through the third quarter. That is more than the entirety of 2015, which saw 23 deals of that size, or 2014, which had just 16 deals over the $10 billion threshold. 3Q 2016 alone saw eight of these mega-deals, the most prominent of which was the $60 billion take-private of technology company EMC by Dell, whose financial sponsors included Silver Lake and MSD Capital. Most recently, but definitely not least, AT&T is looking to acquire Time Warner for $85.4 billion.
Along with these blockbuster deals comes a corresponding rise in deal size across global mergers & acquisitions. Median deal size more than doubled QoQ to $210 million. Interestingly, strategic acquisitions represented the only deal type we feature in this report that jumped on a QoQ basis. The median deal size of such transactions climbed to $42 million in 3Q, up from $26 million in 2Q.
As the average deal size rises, debt usage on those deals has done quite the opposite. Median debt as a percentage of EV fell to 46.9% in 3Q 2016, representing the third quarter in a row that debt percentage has been under 50%. Prior to this year, we had experienced three consecutive years in which no quarter had a reported debt usage of less than 50%. Consequently, acquirers are having to provide more cash and stock to complete these transactions than at any time in the last few years. Despite the current lowinterest- rate environment, borrowers and lenders are not able to realistically pencil out the same percentage of debt to EV given lofty valuations and sluggish earnings growth. Additionally, the prevalence of bolt-on strategies in recent years along with increased concern around the current state of the business cycle could be causing companies to be more conservative with their capital structures in case they are in need of future debt financing—either to stay solvent in tougher times or to make a quick acquisition if the opportunity arises.
Turning now to transaction multiples, median EV-to-EBITDA figures in the third quarter jumped to 10.0x, up from 9.1x in 2Q, and the highest tally in at least the last five years. Some of this change, however, can be attributed to the size of deals coming to market. In 3Q 2016, 17.5% of completed transactions had an EV in excess of $250 million, compared to 15.3% in 2Q and between 13% and 14% during the entirety of 2015.
While some of the recent price increases can be attributed to the change in the size of companies coming to market, we continue to see more buyers than sellers in the market, resulting in elevated prices. Further, the premiums buyers must pay to appeal to the large shareholder bases of publicly traded companies should also be noted. The recent Marriott acquisition of Starwood Hotels and Resorts, which closed in September, was drawn out by a rather dramatic bidding war between Marriott and Anbang Insurance Group, who was backed by J.C. Flowers & Co and Primavera Capital Group. Similarly, the price that Microsoft has agreed to pay for LinkedIn, a deal announced in June but not yet closed, was hiked by interest from Salesforce and others. These deals exemplify the increased competition we’ve seen lately between acquirers, both strategic and financial. With record amounts of cash on corporate balance sheets and similarly high levels of dry powder in PE funds, there is simply too much capital to be deployed across too few companies.
Overall Volume Drops
Mergers & acquisitions by sector & size
IT deal value accounted for 30% of all M&A in the third quarter.
The percentage of deal value in transactions with EV of at least $1 billion remains historically high: 81% in 3Q 2016.
Dealmakers Adapt To Changing Consumer
Representing about 20% of both the count and value of overall mergers & acquisitions transactions, the B2C sector is among the most diverse, featuring companies such as hotel operators, furniture manufacturers, fashion retailers, and movie producers. Each of these companies, however, is adapting to a changing landscape. Retailers continue to address their ecommerce strategies, as selling online is becoming synonymous with selling just about anything. In addition, consumers’ tastes are changing. Millennials increasingly prefer experience-based products and services such as those within the travel and leisure segment, while simultaneously buying fewer luxury goods.
Similarly to the larger mergers & acquisitions landscape, the number of deals in this consumerfacing sector has decreased in the last two quarters, with a notable uptick in the percentage of deals completed by PE firms as opposed to corporate acquirers. The value of those deals, however, remains relatively strong. $89 billion in B2C M&A deals were completed in 3Q 2016, in a 30% QoQ decrease by count, but total value is still well above the historical mean. This is more a function of the larger M&A cycle slowing down, and we expect B2C companies to continue pursuing M&A strategies.
There has been plenty of appetite in the hospitality industry lately as traditional hotels compete with sharing economy models like Airbnb. In September, Marriott International closed its acquisition of Starwood Hotels and Resorts to form a truly behemoth hotel company that will soon combine its consumer rewards programs. Additionally, Anbang Insurance Group acquired Strategic Hotels and Resorts after it dropped out of the Starwood deal.
By PitchBook, read the full article here.