The Strategist

M&A era is gone

04/12/2016 - 11:52

The era of multi-million dollar deals is coming to an end. The number of large transactions worth more than $ 5 billion in the first quarter of 2016 fell by 24% compared with the beginning of 2015. Partially, the deterrent effect also comes from the uncertainty in world markets, the slowdown of emerging economies, and the tightening of the rhetoric on the part of the antitrust and tax authorities.
The total amount of mergers and acquisitions in the first quarter of 2016 was $ 699.4 billion - 18% less than that of the first three months of 2015. This is the worst figure for the last two years. The number of transactions in the first quarter of 2016 decreased by 10% to 9,250. The most significant reduction was observed in the number of large transactions with a volume of more than $ 5 billion - almost a quarter year-to-year.

At that, the number of disrupted transactions peaked to a highest level for the last nine years. According to Dealogic, the total value of transactions canceled since the beginning of 2016 amounted to $ 375.8 billion.

"The uncertainty increases on several fronts, companies became significantly more cautious, the number of transactions for acquisitions worth more than $ 10 billion has decreased significantly", - confirms Luigi Rizzo, head of EMEA mergers and acquisitions in the US bank Merrill Lynch.

At the same time, 2016 promises a redistribution of roles in the investment site. The main activity on the conclusion of transactions is coming from Chinese buyers.

The volume of acquisitions involving Chinese companies as a buyer amounted 44% of the total, or $ 304.6 billion. This is 8% higher than a year earlier. On the US market, the same interest in M&A deals fell by 38% in the first three months of this year, down to $ 245.7 billion.

2015 brought a record number of M&As. The total volume of transactions closed in 2015 is estimated at $ 4.6 trillion. The number of large transactions, the amount of which exceeded $ 30 billion, was 18. This is 2.5 times more than in 2014 (according to Thomson Reuters).

Antitrust and tax authorities of the concerned countries have increased pressure on investors, which also had the deterrent effect on the dynamics of deals.

In recent years, many world’s antitrust regulators have significantly tightened their position in relation to mergers between large companies. Thus, April 6, the US Justice Department filed a lawsuit going against a deal between leaders of the oilfield services market - Halliburton and Baker Hughes, occupying second and third place in the market of oilfield services. The companies agreed on unification in 2014, the deal was estimated at $ 35 billion. According to the US Justice Department, the merger would reduce competition in the market and rise prices for the services.

April 4, the US Treasury announced a new effort to combat tax evasion in the country. The Office stated that it intends to develop new rules to deal with the so-called tax inversion (when an American company buys a foreign competitor in jurisdictions with low taxation, and transfers the main flow of funds away from the United States). US Treasury initiative was supported by the US President Barack Obama, who said that the tax inversion is "one of the most insidious tax loopholes."

The result of such rhetoric was not long in coming. Two days later, it became known that the largest in the pharmaceutical industry deal has been cancelled. Pfizer refused to purchase Irish Allergan (the deal was estimated at $ 160 billion), explaining it as a response to "adverse changes in tax laws."

Revenues from banking consulting services supporting transactions in the first quarter of 2016 fell to a three-year low. According to Thomson Reuters / Freeman Consulting data, financial and credit institutions received $ 6 billion in consulting fees for the first three months, which is 19% lower than the same period of 2015.

Banks-consultants on merger between Pfizer and Allergan pharmaceutical companies have lost about $ 200 million of consulting fees due to the failed deal.

The increased risk of failed transactions made investment bankers change their business tactics. According to Reuters, citing a source in the banking sector, before, investment banks received the bulk of the fees after completion of the transaction. However, now investment bankers need to increase the proportion of the advance payment.