This could be a record year for mergers and acquisitions, surpassing the 2007 peak in the US and globally. But optimism is waning regarding the outlook for 2016.
Rising interest rates and a potential slowing in the US economy are among the main concerns that next year could bring a decline in overall deal volume.
“M&A activity in 2015 surged for much of the year, but respondents clearly are wondering how long it can last,” says Thomas Vaughn, co-leader of law firm Dykema’s M&A practice. Dykema’s recent survey of 147 M&A professionals from more than a dozen US industries found that only 37% expect deal activity to strengthen in the next 12 months—down from 59% in last year’s survey.
In the first nine months of 2015, global M&A activity rose 32% from the same period a year earlier, to $3.2 trillion, according to Thomson Reuters. The number of megadeals valued at more than $10 billion each nearly doubled, to 47. However, the value of dealmaking in the third quarter declined 17% from the second quarter.
Whether the 2007 record is broken this year could depend on the fate of the potential combination of Pfizer and Allergan, which would create the world’s largest pharmaceutical company, valued at more than $330 billion.
The deal, which could be the biggest of 2015 if it goes forward, does not portend a wave of megamergers in the US pharmaceuticals industry, according to Fitch Ratings. “Instead, the rationale behind an Allergan acquisition would be driven by issues unique to Pfizer, including a need to augment growth drivers on the innovative side of the business . . . as well as offering the potential for tax savings by re-domiciling overseas,” Fitch says.
Other US pharmaceuticals companies will continue to focus on smaller, targeted transactions, Fitch says. “The targets will likely be individual products or smaller to mid-size firms that develop these types of drugs,” it says.
The current fast pace of strategic M&A activity has hidden a sharp decline in private-equity-driven buy-out deals, says Richard Peterson, a senior director with the global markets intelligence group at research and analytics firm S&P Capital IQ. Guidance from regulators has deterred banks from financing takeovers with high levels of debt. Some banks are being forced to cut the price of loans they made to fund past buyouts, in order to get investors to take the loans off their books.
Respondents to Dykema’s survey remained optimistic about the outlook for M&A activity involving privately owned businesses, with 72% expecting an increase in such deals in 2016. The main reason cited was that aging business owners might think that valuations of their businesses are reaching top levels. This was followed closely by concerns that the M&A window of opportunity may be closing.