Global merger and acquisition prospects for 2016 seem likely to exceed the pace of activity in 2015, although the reasons are likely to differ from region to region.
Heading into 2016, 57% of American companies have three or more deals in the pipeline, compared with 10% six months earlier, according to an Ernst & Young report on the M&A outlook for 2016. US deal values rose 55.1% in 2015 to a record high of $2.3 trillion, compared with $1.5 trillion in 2014. The report also reveals that deal volumes declined by 3.2%, with 10,845 deals, compared with 11,198 in 2014.
Notwithstanding these figures, the Obama administration continued pursuing actions against mergers in major sectors of the economy. Citing reduced competition and consumer choice, it blocked deals such as office supply store Staples’ attempted takeover of Office Depot and General Electric’s plan to sell its appliance business to Sweden’s AB Electrolux. Such massive deals as the merger of Dow Chemical and E. I. du Pont de Nemours, Charter Communication’s takeover of telecommunications company Time Warner Cable and Walgreens Boots Alliance’s takeover of drugstore chain Rite Aid will face regulatory scrutiny in 2016.
The same factors that drove 2015 figures will continue driving M&A in 2016, says Greg Burkus, founder and managing partner at Shasta Partners, a boutique investment bank based in Waltham, Massachusetts. Corporations’ search for growth is the primary reason for deal activity, he says. “Companies are looking for [product] niches that will fill out their portfolios.” For a company short on technological capabilities, M&A also provides a solution. “They can either build it on their own, or they can use M&A as a vehicle for acquiring expertise,” says Burkus.
He suggests that the combination of low interest rates, strong share valuations, the globalization trend and resurgent business confidence will continue enabling M&A in 2016.
Risks include a derailing of the global economy or sudden drop in equity markets, he says, discounting the potential impact of interest rate increases.
In Europe, the Middle East and Africa, low yields will support increased issuance from corporates in 2016, according to a Fitch Ratings EMEA corporate bond market report.
Fitch expects growth in M&A transactions, driven by savings, modest global growth, a weak euro and low borrowing costs.
In China the drivers for M&A include sluggish demand and oversupply, resulting in the government’s placing a high priority on corporate restructuring, states a research note from Standard Chartered Bank. The recent merger of China Metallurgical Group with China Minmetals typifies the government’s intention to use M&A to achieve restructuring, and Standard Chartered expects this strategy to continue in 2016.
Improving growth at year-end, owing in part to a sales tax cut on automobiles and diminished stock market chaos, could slightly reduce the urgency to merge in some areas, excluding the Internet sector. Large hoards of cash at China’s three major Internet players—Alibaba, Tencent and Baidu—mean that they can continue consolidating the sector, says BNP Paribas.