A blog by Mark Gregory and Barry Perkins
A record year for M&A…
The value of announced M&A deals globally hit a new high of US$4.6t in 2015. Volumes were only slightly off record levels but very close to the highest levels over the last decade. This strong performance is in stark contrast to the rate of economic growth in the world economy which is some way off peak levels. How can we reconcile these two conflicting performances? Is M&A in some way detached from the real economy? Many thanks to my co-author Barry Perkins who has helped my explore this question, he is truly the oracle on all deal related data.
…despite a challenging global economic outlook.
A difficult economic environment can still be positive for M&A activity. With growth hard to find, corporates are looking to improve their market position. M&A is an obvious way to do this possibly by acquiring a competitor or by adding new products and capabilities. Alternatively, slow growth may lead to a focus on improving efficiency and hence deals that offer the prospect of synergies via economies of scale and/or scope begin to look increasingly attractive.
Corporates have become increasingly sophisticated both in their selection and evaluation of target acquisitions and in their approach to post-deal integration. As a result, M&A is now being seen as a relatively low risk form of investment. Profitability is generally good in the developed word and companies have significant financial reserves. The availability of financing has also been improving and the costs of finance have remained relatively low. Yet despite this favourable environment for capital investment, gross fixed capital formation in both the UK and the OECD has run at below its long-run average since the financial crisis. It may well be that corporates remain nervous about the external environment and are looking for a low risk route to invest for growth. In the developed world, M&A appears to be the preferred route for companies looking to balance the search for growth and the need to manage risk.
Divergence also plays a role…
It is not just the rate of global economic growth that has changed in recent years, the relative performance between countries has also shifted and this is one of the factors driving M&A activity. In the US, the relatively strong performance of the economy, robust corporate profitability and buoyant stock markets helped to support M&A activity of US$2.6t, 56% of total global value. Another recovering economy, Europe was the other major region in M&A terms, with European based targets accounting for almost 21% of global value and just over 29% of global volume in 2015.
China’s economic growth, despite slowing, is still relatively large and this pushed deal values to US$674b, just shy of 15% of the global total. By contrast, Latin America, where the economic challenges were very real in 2015, saw targeted M&A value of only US$86b, less than 2% of the global total.
North America and Europe have historically dominated M&A activity, having the largest markets, more private sector and traded companies and a tradition of using deals as a way to grow and restructure. China’s scale means it has joined this group, but it is also an important source of activity outside of its own borders as Chinese businesses continue to internationalise. With growth returning to Europe both Chinese and North America buyers have been active in the region, boosting activity.
…especially at the sector level…
It is not only divergent economic performance between countries that impacts M&A activity, differences across sectors are clear to see. M&A values typically capture the headlines and the largest deals are a window on global mega-trends. However, volumes also matter, the most active sectors may be where innovation is fastest or where restructuring and disruption are in full swing.
In 2015, the technology and consumer products sectors led the world on both volumes and values, with life sciences and diversified industrial products just behind on both measures. These results are in part of a consequence of the factors described above as companies look to position themselves for growth in a difficult economic environment.
- The fall in oil prices has provided a boost to consumer spending in the oil consuming countries but capturing this requires adding new products and capabilities but also looking to M&A to help drive cost efficiency.
- The search for new drags and cost savings also lies behind the performance of Life Sciences.
- As China slows and lower oil and commodity prices hit capex, so industrial companies have moved to rationalise their operations, seeking synergies wherever possible.
The lower activity M&A sectors in 2015 were typically capital intensive and often exposed to public spending and/or regulation. The oil and gas sector was relatively buoyant in deal terms reflecting the pressure to restructure created by the collapse in the oil price.
…with technology a stand out.
Technology’s performance was every strong especially given the relative size of the sector. A key reason is the amount of technology sector deals initiated by companies outside of the sector. Technology is a dynamic and important sector in its own right but increasingly companies in the sector are targets for out of sector buyers seeking to acquire IP and skills to deploy in their own sectors. This can be motivated by a desire to counter disruption from others or to be a disrupter in their own sector. We estimate that the value of this activity has tripled in the last 2 years and volumes are up over 50%. Without doubt, technology M&A is being used to transform and grow businesses across the whole economy.
Is there ever a bad time to buy and sell?
The economic outlook is an important influence on M&A activity but the relationship is a complex one, not solely related to economic growth rates. As we might expect from sophisticated users of capital, divergence at both the country and sector level is a major factor driving activity levels.
For me, it is the use of M&A to restructure business and to seek to capture new sources of growth and competitive advantage that is most interesting. Whatever the economic outlook, businesses cannot rest on their laurels. As the record value of transactions in 2015 shows, deals can make sense at any time whether you a buyer or seller be.