US M&A Is Booming – Continuing The Record-Breaking Trends From Last Year by MergerMarket
In the first six months of the year, the US market delivered US$753.3 billion worth of deals, up from US$598 billion in H1 2014. US M&A is on pace to post its best performance since 2007.
Activity has been supported by an incredibly friendly deal environment. The US economy is stable and has grown for each of the last five years. Interest rates remain low, which has allowed for cheap and plentiful financing. Corporates and private equity firms have accumulated substantial cash piles, and shareholders and investors are eager for boards to use this capital to deliver growth and make large strategic acquisitions. It is estimated that US corporates have US$1.4 trillion of unused cash at their disposal, and private equity firms are sitting on US$1.3 trillion. Megadeals in the technology, media and telecommunications (TMT), healthcare and pharmaceutical sectors, such as the US$55 billion deal between Charter and Time Warner Cable, Anthem’s US$54.2 billion acquisition of Cigna and Mylan’s US$27 billion move for Perrigo, have been a feature of the market for more than 18 months now. There has seldom been a better set of circumstances to support dealmaking.
As robust as US deal activity is, however, the big question is whether this bull run can be sustained. Valuations have soared alarmingly, with average prices now sitting at 16x EBITDA.
Also worrying is the fact that the rise in deal valuations is not matched by a similar increase in the number of deals initiated. Deal values have been skewed by a handful of megadeals in a small number of sectors. If the surge in megadeals does ease, overall deal values could fall sharply in H2.
Recent stock market volatility, uncertainty in the financing markets and anticipated interest rate increases in the fall could put a break on M&A too. If stock prices fall for a sustained period of time, enthusiasm for deals among buyers is likely to decline, particularly because it may take a while for sellers’ expectations to adjust to new price realities. A mismatch between buyers’ and sellers’ expectations would negatively affect M&A activity.
New investments from private equity firms will also need to increase if current momentum is to be sustained. Private equity buyouts are down from 2014—many firms feel that deals are too expensive and that it is very difficult to compete with cash-rich corporates. After a record run of exits in 2014, both the number and the value of private equity deals are down.
US M&A markets are strong, but challenges remain for dealmakers and advisors. The number of mid-market deals needs to increase before it can be said that the market has made a full recovery. The high multiples paid for assets is also a concern, and stock market volatility could create a meaningful difference in price expectations between buyers and sellers.
US M&A market proves a record 2014 was no one-off
Headlines
- US deal values at record half-year high
- Deal values were up by more than a quarter compared with H1 2014
- Growing economy, low-interest environment, record cash balances and high stock market valuations continue to foster thriving M&A environment
- Inbound investment is rising
- India ranks as a top 10 inbound bidder for the first time since 2012
- Japanese inbound investment value already higher than whole of 2013
- Megadeal mania continues with 32 deals in H1 2015
In 2014, US dealmakers celebrated a long-overdue comeback, and the positive momentum continued into 2015. In the first six months of the year, the US M&A market posted its strongest first-half performance since the downturn.
There were US$753.3 billion worth of deals secured in H1 2015, up from US$598 billion in H1 2014, putting the market on track to deliver its best year since its last peak in 2007.
Strong macroeconomic fundamentals have supported this surge. According to the World Bank, the US economy grew by 2.4 percent in 2014 and has grown for the last five years. Stock markets are up too, with the S&P 500 rising by more than 12.5 percent over the last 18 months.
Unemployment fell to 5.3 percent, according to the US Department of Labor, the lowest since 2009. And at the beginning of 2015, the University of Michigan’s consumer confidence index was at an 11-year high.
Sustained low interest rates have ensured that financing is readily available; US loan issuance came in at US$1.1 trillion in H1 2015, representing 52 percent of global issuance according to Thomson Reuters.
Meanwhile, corporates and PE firms are sitting on record amounts of cash. According to consultancy Factset, non-financial US corporates have US$1.4 trillion at their disposal—a record high—while Preqin estimates that buyout firms have US$1.3 trillion.
Boards and investors are eager to deploy this capital. A survey of more than 100 US CEOs by PricewaterhouseCoopers showed that more than half expect to complete a domestic acquisition in 2015. Research by Bank of America Merrill Lynch, which included a survey of 234 fund managers with US$653 billion in assets under management, found that more than two-thirds believed companies should be using profits to grow, rather than just paying out dividends and conducting share buybacks.
The surge in megadeals has added fuel to market confidence. And, in some cases, megadeals change the competitive landscape, causing players across an industry to respond with their own transactions, as has happened in the healthcare sector.
Boards are using cash to do deals that will further their strategic aims, protect market positions and pursue growth. The Charter/Time Warner transaction, for example, will enable the two companies to provide an expanded service offering, reach more customers, reduce costs and create a business at the forefront of technological developments.
“The stock market has rewarded acquirers much more than in the past. It appears to have taken a view that strong acquirers can improve their business by getting bigger and taking advantage of the things that come with scale like synergies, access to other markets and strength with suppliers,” says White & Case partner John Reiss. “It’s a booming M&A market because we have booming valuations. Valuations are high because there is a strong stock market, which gives people who pay in stock more currency and rewards acquisitions.”
US M&A markets are still strong, but the question now is how long can the current level of activity be sustained.
Inbound rebound
Against the favorable backdrop in the United States, H1 2015 inbound value rose by 15 percent to US$163 billion. Interest from the United Kingdom was particularly strong in H1 2015, with 60 deals worth US$17.7 billion, making it the second highest inbound bidder by volume.
Another key investor is Japan. By value, the country is second only to Canada in H1 and Japan’s total spend of US$18.7 billion is higher than its entire 2013 total. Japanese deal volumes are also higher in H1, with 41 deals, compared to 29 in H1 2014.
Japanese corporates have cash to deploy and are eager to buy technology from abroad that supports their strategic objectives. In February, Japan’s Asahi Kasei paid US$2.2 billion for the energy storage business of US group Polypore. The deal was driven by Asahi Kasei’s strategy of strengthening its business globally and expanding its technology in the area of batteries and energy storage materials.
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