M&A activity peaks in 2017

This marks the highest levels since the 2007-2009 financial crisis. Analysts opine that after the passing of the U.S. Tax bill, M&A activity could pick up in 2018.

2017 has been a strong year for the M&A scene with activity in the industry reaching their third highest annual peak since the 2007-2009 financial crisis. Much of this development can be attributed to buoyant markets which emboldened CEOs to pursue their market shaping deals.

The confidence in the Mergers & Acquisition market was there even before there was certainty over the historic U.S. tax overhaul advocated by the Republican party which ensured that it became law.

Major economies the world over saw accelerating economic growth.

What set this year apart was the willingness of CEOs to pursue their acquisitions even if their target was unwilling.

Case in point: Broadcom’s successful $103 billion cash-and-stock acquisition of its peer Qualcomm Inc was despite its unwillingness to engage in talks.

“In cases where companies have been sold, close to 80 percent of them were initiated by the buyer approaching the seller as opposed to companies who decided to sell,” said Michael Carr, global co-head of mergers & acquisitions at Goldman Sachs Group Inc.

He went on to add, “Some of this is driven by buyers who believe they will not face competition, which encourages them to aggressively pressure their targets confidentially with the implied threat that they will go public”.

Unsolicited takeovers have made the global M&A scene to a whopping $3.54 trillion this year, compared to $3.59 trillion last year, according to preliminary Thomson Reuters data.

The M&A activity peaked in 2015 when it totaled to $4.22 trillion.

Much of this deal making activity can be attributed to the availability of cheap debt financing and high CEO confidence despite geopolitical turmoil, including confronting North Korea over its nuclear missile ambition and the failure of Angela Merkell’s party to form a working coalition in Germany.

“Geopolitical uncertainty has had relatively little impact on our deals pipeline this year,” said Cyrus Kapadia, vice chairman of investment banking at Lazard Ltd.

“Boards are supportive of deal-making where there is clear strategic rationale, and even in Britain, where Brexit is causing some uncertainty, companies are still pursuing large-scale deals to enhance organic growth,” added Kapadia.

Despite the U.S. facing a 16% drop in M&A activity of $1.4 trillion, globally it saw a 16% rise with Europe contributing $856 billion and the Asia Pacific region contributing another $912 billion, according to Thomson Reuters data.

Among the biggest acquisitions in the U.S. was that of CVS Health Corp, a U.S. drugstore chain operator, acquiring Aetna Inc, a health insurer, for a record $69 billion; the others include Walt Disney Co’s $52 billion acquisition of film and television businesses from Twenty-First Century Fox Inc and United Technologies Corp’s $30 billion acquisition of Rockwell Collins Inc.

Significantly, many of these deals had stock as part of the purchase price, with acquirers using their own shares as currency given the high valuation of their shares.

“We are seeing a stock component becoming a bigger portion of the offers being made, perhaps because the deals are bigger and transformative, and acquirers are looking to offer targets additional upside in these transactions,” said Stephen Arcano, an M&A partner at law firm Skadden, Arps, Slate, Meagher & Flom LLP.

Globally, private equity-backed M&A activity totaled $322.6 billion in 2017, a rise of 27% compared to the previous year.

“If you are an acquirer, you are likely modeling a deal where the synergies and the incremental value of combining is what is driving your purchase price and your premium, not an assumption on the underlying tax rate,” said Chris Ventresca, global M&A co-head at ‎JPMorgan Chase & Co. “If you are considering selling the entire company, as long as the buyer is willing to pay your price, you take the certainty of crystallizing a premium now with some ability to participate in tax reform upside via buyer stock”.

Following the passing of the U.S. tax bill, M&A activity in 2018 could be higher since CEOs may allocate more of their funds for acquisitions.

“U.S. companies with lots of cash trapped overseas can now more easily put capital to work in the M&A market, while Europeans may try to take advantage of favorable tax policies to do more deals in the United States,” said Dietrich Becker, co-head of European advisory at Perella Weinberg Partners LP.

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