After a record-setting 2016, M&A activity in North America and Europe has totaled $1.42 trillion across 13,972 deals through 3Q 2017, declines of 19% and 23% from the same period last year. But as the cycle winds down, and private markets become increasingly institutionalized, are we due for a mild correction or a longer-term reset? Our 3Q 2017 M&A Report delves into multiple datasets to explore these emerging themes, ranging from transaction multiples to M&A by geography.
- After a record-setting 2016, M&A activity in North America and Europe has totaled $1.4 trillion across 13,972 deals through 3Q 2017, declines of 19% and 23% from the same period last year.
- The proportion of target companies that have institutional backing (i.e. private equity or venture capital) at the time of acquisition has risen to an all-time high of 16.9% of M&A. The trend reflects the growing institutionalization of private markets, particularly in the developed markets of North America and Europe.
- Amidst declining activity, M&A today increasingly involves larger acquisition targets. The median transaction size has risen from $31.6 million in 2016 to $52.7 million through 3Q 2017, a 66% increase. Rising valuations, platform roll-ups, and large cash reserves on corporate balance sheets are all driving the increase in deal sizes.
Beginning last quarter, we revised our methodology for estimating total deal flow. Through this and other recent methodology changes, we aim to provide an even more accurate picture of the private markets. Please see the methodology page for this report for more details.
Chilton Capital's REIT Composite was up 6.1% last month, compared to the MSCI U.S. REIT Index, which gained 4.4%. Year to date, Chilton is up 6.3% net and 6.5% gross, compared to the index's 8.8% return. The firm met virtually with almost 40 real estate investment trusts last month and released the highlights of those Read More
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Dylan E. Cox
The M&A cycle subsides
After a record-setting year in 2016, M&A activity in North America and Europe has totaled $1.4 trillion across 13,972 deals through 3Q 2017, declines of 19% and 23% from the same period last year. Through 3Q, M&A activity resembles dealmaking during 2011 to 2013 more than it does the recent boom from 2014 to 2016. Amid declining volume, M&A today increasingly involves larger acquisition targets. The median transaction size has risen from $31.6 million in 2016 to $52.7 million through 3Q 2017, a 66% increase. Rising valuations, large cash reserves on corporate balance sheets, and platform rollups resulting from PE add-ons are all driving the increase in deal sizes. No company seems too large to be considered a target.
Cross-Atlantic deal flow continues to be a more prominent feature of today’s M&A landscape. Through 3Q 2017, 6.6% of North American deals involved European acquirers and 9.4% of European deals involved North American acquirers, compared to 5.8% and 7.2%, respectively, in 2007. Two key drivers of this trend include the increasingly global nature of trade and the broadening reach of PE firms, many of which have now established offices across the pond from where they’re headquartered.
A slowdown despite some positive signs
M&A activity in North America totaled $925.3 billion across 7,348 transactions through 3Q 2017, 24.3% and 22.6% behind the first three quarters of 2016. The slowdown comes despite an increase in CEO confidence—a historical bellwether for M&A activity—and a 14.2% increase in the value of the S&P 500 (using total return) in the first three quarters of 2017. Facing the possibility of major tax and healthcare reform this year, some investors in the US have taken a wait-and-see approach to M&A. If dealmakers get more clarity regarding potential changes to either system, they will be more likely to pursue deals.
While activity slowed in North America, prices continued to rise. The median EV/EBITDA multiple for transactions completed through 3Q 2017 edged up to 10.6x—the highest we’ve ever tracked. Easy credit continues to fuel price increases, with the median debt usage jumping to 5.9x EBITDA through 3Q 2017, comfortably higher than any other year in our dataset. Higher debt multiples reflect the currently voracious appetite for leveraged loans, with new issuance volume on track to surpass pre-financial crisis levels, according to S&P LCD. Though equity contributions have inched downward to 4.8x EBITDA this year, they also remain elevated on a historical basis due to the elevated pricing environment.
Europe resembles North America in some respects
Similar to their North American counterparts, European investors have slowed their pace of dealmaking this year. European M&A activity totaled $438.95 billion across 5,810 transactions through 3Q 2017, 19.8% and 32.2% behind the same period last year. Following the UK’s vote last year to leave the EU, would be acquirers feared that further political disintegration was likely if anti-establishment parties had won elections in the Netherlands, France, or Germany. While some of these fears have abated, the political situation in Europe remains tenuous. At the same time, the ECB faces the daunting task of ending QE without impeding growth. Recently, it indicated it would slowly taper its bond-buying program into 2018, assuaging any fears of a sharp rise in interest rates in the near term and increasing the likelihood of strong deal flow into next year.
After tapering off slightly in the first two quarters of the year, the median European EV/EBITDA multiple rebounded to 10.8x in for transactions completed in 3Q 2017, bringing the European YTD median to 10.0x, the highest in our dataset. The rise in valuations can be partially attributed to the booming leveraged loan market, as well as increased competition for a limited number of acquisition targets resulting from the eruption in M&A activity during 2015 and 2016.
M&A targets are increasingly sophisticated
Spotlight: Target company characteristics
The proportion of target companies that have institutional backing (i.e. PE or VC) at the time of acquisition has risen to an all-time high of 16.9%. Another 3.8% of targets were publicly traded when the deal was struck, the highest recorded since 2009, leaving just 79.1% of acquired companies that were neither publicly traded nor had any sort of private backing—the lowest on record. If this trend continues through the fourth quarter, it will mark the first time the figure has dropped below 80% for a full year. In any case, the trend reflects the growing institutionalization of private markets worldwide. Particularly in the developed markets of North America and Europe, companies are increasingly traded not between individuals and families, but rather sophisticated investors.
Despite the recent appreciation in price-to-earnings ratios and continued de-listings in public equities markets, publicly traded firms have regained popularity as acquisition targets in recent years. As mentioned above, 3.8% of M&A transactions this year have targeted publicly traded firms, up from 3.2% in 2016 and a low of 2.2% in 2014 (including both public and private acquirers). The figure includes divestitures from publicly traded firms, which are a popular target for PE firms. That publicly listed companies are being acquired at a faster pace despite higher prices illustrates that acquirers are willing to pay top dollar when there are fewer quality targets available in the market.
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