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OUR INSIGHTS INTO M&A TRENDS: DECEMBER 2016
OUR INSIGHTS INTO M&A TRENDS: DECEMBER 2016
� Uncertainty over the political and economic future of the US and Europe, and the slowdown of the global economy, impeded strategic M&A in 2016. Globally, deal values fell 17% in the year to date, as compared to the same period in 2015. Mega-mergers have dropped away as a result of dampened boardroom confidence and a clampdown on tax inversions. The unpredictable geo-political and economic climate looks set to continue into 2017.
� Transaction value in the US, the world’s largest M&A market, was hit by market volatility and the fall in oil prices at the start of the year, increased regulatory scrutiny of deals, and political uncertainty. Donald Trump’s election will have significant implications - from infrastructure to environmental policy, to financial services, to tax liberalisation, President-elect Trump has committed to sweeping action, yet details of his plans for reform are unclear.
� Chinese state-owned and private enterprises have been on a global M&A spree in 2016, with Chinese outbound M&A topping US$187.5bn in the year to date. Tech, retail and healthcare sectors were the focus, as Chinese businesses sought to move away from resources and pursue brands and knowhow, and to enter new markets (e.g. CNCC/Syngenta in the agribusiness sector and Anbang Insurance/Strategic Hotels in the leisure sector). The announcement in November of restrictions on outbound M&A by Chinese companies may well slow the tide of Chinese outbound M&A in 2017.
� Technology M&A boomed in 2016 and we expect it to continue to be the hottest sector in 2017. Businesses are turning to tech to secure competitive advantage by acquiring innovation and AI processes through M&A. With companies across all industries transitioning to greater tech dependency, as evidenced by the rise of Fintech in financial services, medical technology in the pharmaceutical sector and the success of online platforms transforming product delivery, traditional boundaries between technology and other sectors are eroding.
� We are seeing a new wave of national political and regulatory scrutiny and increased protectionist rhetoric, largely as a result of rising populism and nationalist sentiment. This impacts deals in real time, such as the AT&T/Time Warner merger in the US, which President-elect Trump threatened to block, and the Fujian/Aixtron deal in Germany and the US. We also see the perceived increased risk of state intervention preventing some deals from ever leaving the starting blocks.
� Low interest rates and unprecedented liquidity in the finance markets have facilitated both a large volume of M&A deals and M&A jumbo financings, such as the US$57bn loan for the US$66bn acquisition of Monsanto by Bayer and the financing for the US$43bn acquisition of Syngenta by CNCC. Moving forward into 2017, diverging finance markets, currency volatility and interest rate rises will add to the complexity of finance and investor choices in cross-border M&A.
“2016 has been a political and economic rollercoaster, and global M&A has been affected accordingly, especially in the first six months. In Europe, we have had Brexit and a surprise Italian referendum result, with more uncertainty to follow with French, German and Dutch elections next year. Meanwhile the realities of a Trump presidency will unfold over time, perhaps leading to a further period of ‘wait and see’ for M&A, whilst Chinese moves to limit capital outflows may reduce the recent flow of deals from the east. But despite the challenges there remain strong pockets of transactional activity, principally in the tech and industrial sectors. The continuing availability of cash on balance sheets, low interest rates and liquid acquisition financing sources mean that the quest for growth through M&A will likely continue into 2017 even if somewhat tempered by political and economic headwinds.”
Guy Norman Global Head of Corporate, Clifford Chance LLP
OUR INSIGHTS INTO M&A TRENDS Approaching the end of a challenging year for M&A, we reflect on some of the key themes of 2016 and look ahead to consider the risks and opportunities for 2017.
GLOBAL ACTIVITY LEVELSWe review MergerMarket’s data for M&A activity (by value) for the year to date.
Global M&A fell 17% in the year to date. Deal value totalled US$2.7trn, compared to US$3.3trn in the same period in 2015. Volume of deals has also fallen by 7%. However, these numbers should be viewed in the context of 2015 being the best year ever for M&A. 2016 activity picked up significantly in September and October, which both recorded deal values globally exceeding the same months in 2015. However, expectations are that the tail end of the year may see a moderate drop-off in global activity levels.
Deal value in North America is down 23% year on year (and US domestic M&A fell 33%), and within Asia Pacific total M&A is down 19%. European M&A is also down by 6% - a figure that masks significant differences between markets. For example, UK M&A fell 54% year on year whilst German M&A rose 20%. Elsewhere, hotspots of activity include India and the Middle East.
Companies and investors continue to look further afield for deals in 2016. In the year to date over 28% of total M&A value was through global cross-regional deals. Chinese buyers are leading the charge globally – with outbound investment totalling US$187.5bn year to date (+180% year on year). Chinese investment is targeting Europe (US$81.7bn), North America (US$52.6bn) and Latin America (US$16.1bn).
Technology and Industrials & Chemicals are the hot sectors. Technology-focused transactions are not limited to the TMT sector but are also taking place across other sectors, most notably in the area of business services. Tech and Industrial & Chemicals mega-deals are taking centre stage, with the year’s biggest deals being Time Warner/AT&T and Monsanto/Bayer. The Consumer, Retail and Leisure sector has seen the biggest fall in deal value year on year, with its share of total deal activity falling from 16% in 2015 to 9% in the year to date (by value).
Private equity activity has bounced in the last quarter of the year, as pressure on sponsors to deploy capital has increased. We see sponsors taking advantage of FX turmoil and uncertainty (e.g. the UK has become more attractive to euro and dollar funds as a result of Brexit or those taking a bullish view on UK consumer behaviour). Also, the liquidity of the loan market, particularly in Europe, has allowed market participants to benefit from attractive pricing and improved ‘cov-lite’ documentary terms.
Source: Mergermarket
Source: Mergermarket
GLOBAL M&A ACTIVITY – QUARTERLY
Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4f
Valu
e of
dea
ls (U
S$b
n)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
n n Deal Value $m n Q4 2016 Forecast Deal Volume Q4 2016 Forecast
Volume of deals
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
1400
1200
1000
800
600
400
200
0
+3%
+4%
+2%
Industrials and Chemicals
Consumer, Retail and Leisure
SECTOR AND REGIONAL TRENDSWhilst deal activity fell across the board in 2016, TMT and Industrials stand out as the highest performers in terms of deal value and market share.
REGIONAL TRENDS
Jan-Nov 2016 vs Jan-Nov 2015
Jan-Nov 2016 vs Jan-Nov 2015 Jan-Nov 2016 vs
Jan-Nov 2015
North America US$1.3 trillion
Europe US$625 billion Asia Pacific
US$616 billion
Central and South America US$77 billion
Source: Mergermarket
Note: Interactive maps showing investment flows into and out of each region are available on the Clifford Chance Global M&A Toolkit
-23%
-6%-19%
Jan-Nov 2016 vs Jan-Nov 2015
Jan-Nov 2016 vs Jan-Nov 2015
+3%
+48%
Middle East and Africa US$72 billion
Source: Mergermarket
TMT
Healthcare
Energy, Mining and Utilities
Real Estate and Construction
Financial Services
Transportation
Change in market share from 2015 (%)Deal Value 2016 to date ($USbn)
0 100 200 300 400 500 600
-3%
-7%
-1%
-2%
M&A IN 2017: WHAT NEXT?
CHINA TAKES CENTRE STAGE
POPULISM GIVES RISE TO PROTECTIONISM
TRUMP AND BEPS
IN PURSUIT OF INNOVATION
Simon ClintonM&A Partner and Head of London China Desk [email protected] +44 20 7006 5665
Nelson JungAntitrust Partner [email protected] +44 20 7006 6675
Dan NeidleTax Partner [email protected] +44 20 7006 8811
Brian HarleyTMT Senior Associate [email protected] +44 20 7006 2477
Despite global concern over the slowdown in China, Chinese outbound M&A surged in 2016, reaching US$187.5bn in the year to date. Chinese corporates continue to seek exposure to growth industries in western markets and portfolio diversification of assets and technologies outside the Chinese economy.
The increasing volume of Chinese outbound activity has become a source of concern to the Chinese authorities, resulting in attempts to curb capital outflows and combat further depreciation of the renminbi through new regulation. Whilst these reforms demonstrate the threat of heightened government intervention, the high demand from Chinese corporates to acquire overseas assets means that, although we may see different deal structures and fewer non-strategic deals, ultimately Chinese buyers will innovate and will continue to be active outbound buyers.
Antitrust authorities are intervening in more deals, particularly in the US and EU. In the short term, we see that as an M&A generator, as well as an inhibitor: while some deals are prohibited, many more are originated as a result of divestment remedies imposed to obtain clearance. Protectionism is also increasing, with Chinese buyers in particular being subject to stringent reviews on national security and public interest grounds in the US, Australia, Canada and Germany. This trend looks set to continue in 2017, with UK legislative proposals for more extensive powers to control investments in ‘critical infrastructure’ and calls from Germany for more freedom under EU law for national governments to block or impose conditions on overseas investment.
The tax landscape in 2017 is likely to be dominated by two very different developments: Trump and BEPS.
President-elect Donald Trump and the Republican Party have proposed tax reforms that, if adopted, could prompt the repatriation of worldwide profits and corporate restructurings by US-headquartered groups.
BEPS is the OECD’s project to reshape the rules of international tax. 2017 is likely to be the year in which it starts being implemented worldwide. Its key effects will be to reduce the tax benefit of debt financing, increase tax risk for acquisitions of complex legacy structures, and it may mean that many ‘standard’ financing and acquisition structures are no longer effective from a tax perspective.
Increasing pressures on businesses to maintain their competitive edge through innovation are driving growth in technology-focused M&A. Reaping the benefits of innovation requires effectively deploying the acquired technologies and so the success or failure of acquisitions is dependent on a smooth post-acquisition integration process. This is also reflected in broader M&A, where the challenges of separating and integrating a target’s technology platform can be a key determinant of its attractiveness as a target. Beyond simple acquisitions, businesses are also exploring a wide variety of alternative innovation-driven strategic relationships with technology partners, from joint ventures, to outsourcings, to commercial relationships, each with their own set of challenges.
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This publication includes data produced by Mergermarket, for the period 1 January 2016 to 7 November 2016.
This publication does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice.
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© Clifford Chance, 2016
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