After five years of solid recovery and consistent growth, global mergers and acquisitions activity (M&A) hit an all-time high in 2015. Pfizer Inc.’s merger with Allergan PLC was the biggest health care transaction of the year and the second biggest on record. Dell Inc. acquired EMC Corp. in the largest tech deal in history. The Anheuser-Busch InBev acquisition of SABMiller PLC was the largest beverage industry deal ever, at a price of $108 billion. Lesser-known companies added to the M&A count as well, with organizations such as China’s Shanghai STO Express Co. and Zhejiang IDC Fluid Control Co. combining. After such a successful year, what do M&A industry experts expect for the future? Here’s a look into what’s going on.
About Those Big Mergers and Acquisitions in 2015
Industry watchdogs offer a caveat about several of the large deals that came about in 2015. For example, the Pfizer/Allergan agreement was largely based on Pfizer’s desire to avoid paying taxes. Lawmakers in Washington are looking for ways to close these types of tax loopholes. If they succeed, many experts predict an eventual drop off in deals of this type. Some experts also believe that the beverage and tech industries offer limited room for surging M&A activities. It’s unlikely that record-breaking deals among large corporations can continue at the same pace. However, middle market company M&A appear to be stepping up.
Back on Track
Favorable conditions, such as record-low interest rates, have given CEOs confidence they haven’t felt in years. When asked how a federal reserve interest rate increase would influence the upsurge, Ray McGuire, Citi’s global head of corporate and investment banking said that “in order for there to be a dislocation of the market as a result of that move, they’d have to move pretty considerably.”
M&A industry insiders like Cary Kochman explain that corporate leaders no longer worry that the recovery is a fluke, but believe now is the time to optimize portfolios and pursue acquisitions.
The effects of the Great Recession and its immediate aftermath turned surviving companies into lean, mean corporate machines. Forced to reduce costs, streamline operations and refocus, stakeholders are now ready to see significant growth.
Many CEOs believe the time is right to increase revenue not through purchases, but rather through transformative deals.
The current M&A environment is a balanced mix of both buyers and sellers, making deals easier and more reasonable.
Because the economic recovery has been slow but steady, much of the upswing in mergers and acquisitions can be explained as logical catch-up. The catch-up activity has been strongest in the United States and United Kingdom. In fact, a report by Citi stated that, “The strong rise did not appear to be a bubble or a reason for caution.” Further comparing today’s M&A surge with past “bubbles,” the report said that the fact that M&A activity is not limited to one or two hot sectors, such as telecoms in 1999, is a good sign. For now, higher global M&A activity is spread across multiple sectors, including technology, health care, general manufacturing, energy and government contracting.
Market volatility is still on the minds of corporate executives, however. Concerns over China’s economy, the Middle East, commodity prices and the stock market lead some CEOS to believe that another financial crisis could occur sooner rather than later. That in itself could make 2016 another M&A year for the record books.