Global dealmaking has reached $2.5tn in the first half of 2018, breaking the all-time high for the period and underscoring the intense nature of mergers and acquisition activity in spite of increasingly bitter geopolitical tensions.
A wave of megadeals led by the US media and telecoms sector helped to lift worldwide deal volumes 65 per cent from the same time a year ago and the most, on a nominal basis, since Thomson Reuters began keeping data on M&A in 1980.
The record breaking pace of dealmaking stands in contrast to a looming trade war sparked by US President Donald Trump against China and renewed fears of political instability in the Eurozone, particularly in Italy and Spain, that have shaken markets.
Enriched by corporate tax cuts from the Trump administration and stronger economic growth, US corporate boardrooms have sought to strike deals that allow them to either consolidate their industries or compete against a tide of powerful digital disrupters. “Technological disruption continues to be a big driver behind large M&A,” said Blair Effron, co-founder of advisory firm Centerview Partners.
“Big shifts in technology are forcing companies across all industries to be creative and forge more strategic combinations. Adding in economic tailwinds and a continuing strong financing environment makes the current robust M&A market unsurprising.”
US cable group Comcast and media rival Disney are locked up in a $70bn bidding war to buy the majority of Rupert Murdoch’s 21st Century Fox as well as a £22bn battle to acquire pan-European broadcaster Sky. The two companies believe both assets are crucial if traditional media groups are going to remain competitive against the likes of Amazon, Google and Netflix.
Worldwide M&A volumes surge in 2018 Other blockbuster deals in the first half include the acquisition of Irish drugmaker Shire by Japan’s Takeda for $77bn and T-Mobile’s $59bn merger with rival US telecom operator Sprint.
“The M&A market has continued to be extremely robust in the first half of 2018 and current indications point to that continuing into the second half of the year,” said Scott Barshay, partner at law firm Paul Weiss.
“That said, the spectre of trade wars and interest rate hikes and increasing concerns over equity valuations are major risks.” Globally companies signed 79 deals above $5bn, surpassing the previous year to date record set in 2007, and a record 35 deals above $10bn, as large companies across all sectors being disrupted by technology felt the need to merge with old rivals to have enough scale to compete.
“Rising interest rates are not the major concern for corporates,” said Stephen Arcano, global co-head of the transactions practices at law firm Skadden. “Most companies are primarily focused on how to increase earnings in an economic environment where organic growth may be improving, but not fast enough.
Deals are often still the best solution to that problem.” Deal activity was spread across all regions: in the US it returned to the highs experienced before the 2008 crisis, in Europe deal activity nearly doubled and in Asia dealmaking was up 22 per cent compared with a year earlier.
Colm Donlon, head of mergers and acquisitions for Morgan Stanley in Europe, the Middle East and Africa, said a series of factors have converged to feed the record pace of activity, including a focus on consolidation in corporate Europe and a targeted return to dealmaking into the region by Chinese and Japanese companies. “You’ve got almost a perfect storm for the M&A market. We’ve never been busier,” he said.
Mega-deals become the norm Big ticket acquisitions have increasingly become the norm. Deals above the $5bn mark account for more than half of the $2.4tn of transactions already struck this year, a record high level, including 35 deals worth at least 11 figures, writes Eric Platt in New York. Mega deals continue to defy political uncertainty
The $10bn-plus club counts the likes of T-Mobile USA’s $59bn takeover of rival Sprint, retailing group Walmart’s $16bn purchase of Flipkart and the bidding war between Comcast and Disney that could push the value of pan-European broadcasting group Sky above $40bn. JPMorgan’s M&A team estimates that 66 deals could be struck this year for more than $10bn, which would be a record high.
Companies, regardless of industry, have sought to head off technological disruption and bolster revenue growth. Boards have turned to acquisitions as an avenue to do that, and they have been emboldened by easy access to credit. Relatively high share prices have also provided companies with a currency to complete stock deals.
Uncertain regulatory landscape The record spurt of dealmaking has not come without its challenges, as companies and their advisers face an opaque US and Chinese regulatory backdrop, writes Eric Platt.
The hurdles have been most clearly symbolised by two deals: AT&T’s $80bn takeover of media group Time Warner, and Qualcomm’s still unfinished $45bn purchase of semiconductor group NXP. The US government’s challenge of AT&T’s acquisition ultimately failed, which bankers and lawyers said was a welcome relief.
Had the government won its case — the first big antitrust litigation against a vertical merger in decades — it could have led to the downfall of a number of blockbuster deals.
Instead it reaffirmed the status quo that transactions between companies at different points in the supply chain are not generally anti-competitive. Enthusiasm after AT&T’s victory has been somewhat tempered by a long-awaited decision an ocean away. Qualcomm has spent nearly two years trying to close its takeover of NXP in a deal that hinges on approval from Chinese regulators.
The fallout from the Qualcomm-NXP deal, and others that have been blocked by the Trump administration, has been felt. US companies up for sale will sometimes avoid transactions with Chinese groups, out of concern they will face a national security review.
Anu Aiyengar, head of JPMorgan’s M&A business in North America, noted that companies were adapting to an uncertain regulatory landscape. Groups have sought higher termination fees and more flexible operating covenants, which gives the management of a selling company more leeway in how they run the business before a deal closes. “There are some deals which were announced in 2016 still waiting for approval,” she said.
“How do you protect the franchise value of a company for so long? There’s really no value a buyer can offer a seller that offsets the effect on your franchise if a deal does not go through after such a long time.”
China deals buoyant despite US protectionism Protectionism in the US has put the brakes on Chinese outbound investment in the first half of 2018 but that has not stopped some groups from turning their focus to Europe and launching significant energy and industrial deals, writes Don Weinland in Hong Kong.
Outbound dealmaking in China hit $76bn in the first six months of the year, down 38 per cent on the same time last year and marking a four-year low. Outside of the US, however, China’s acquisitions of energy and power assets have remained buoyant. Deals in those areas reached $39bn, an 89 per cent increase on the year before and a new record for the country.
Rush for energy and power deals in China “This is definitely an area where activity is increasing,” said Monica Sun, a Beijing-based partner at Herbert Smith Freehills. The bulk of the $39bn figure was captured by one transaction that has yet to be agreed: state-owned China Three Gorges’ unsolicited offer on Portuguese power utility EDP worth $28.6bn, including net debt.
Some private groups have proved capable of clever transactions. Carmaker Geely, for example, built a $9bn stake in Germany’s Daimler in February. Following a wave of acquisitions by private companies in 2016, the Chinese government has constrained many of those dealmakers, while allowing state companies to continue their overseas activity.
“The China outbound M&A landscape has been re-configured with the reining in of the private sector serial transactors and the re-emergence of Chinese state-owned buyers,” said Colin Banfield, joint head of global cross-border M&A at Citi.
Private equity sees robust levels in US and Asia Private equity dealmaking experienced its strongest levels yet in the US and Asia as investors piled into the sector at their greatest pace since the financial crisis, writes Javier Espinoza in London.
But looming uncertainties over Brexit in the UK could put a damper on mega deals in Europe as business confidence hit a new low, industry insiders warned. Global private equity volumes Global private equity-backed M&A activity totalled $204.3bn during the first half of the year, representing a 48 per cent rise compared with last year, according to figures from data provider Thomson Reuters.
In the US, private equity-backed M&A reached $107.6bn during the first half of the year, a rise of 46 per cent compared with the same period a year earlier and the highest levels since 2007. Dealmaking in Asia-Pacific totalled $45.1bn, the strongest year yet.
The data were published at a time when buyout funds are paying record-high prices for assets in a highly competitive environment under pressure to spend it.
How did the 2008 financial crisis affect you? Global financial crisis Tell us your story It also comes at a time when financing for deals is nearing pre-financial crisis levels, raising fears that the market is seeing a repeat of the dynamics of the boom years just before the bust of a decade ago.
Separately, dealmaking in Europe saw a 9 per cent rise in activity amounting to $41.3bn during the first half of the year. Paul Dolman, a partner at London-based law firm Travers Smith, said the sector had been able to withstand political uncertainty but anticipated difficult times ahead.
“One thing that is not good for private equity is a lack of visibility and the short-term impact of Brexit is likely to see a reduction in private equity M&A in the UK and Europe,” he said.