NEW YORK/LONDON • Dealmakers celebrating a record year for mergers and acquisitions (M&A) that was bolstered by mega deals are pinning their hopes on a larger number of smaller deals to fuel consolidation next year.
While the number of announced deals globally declined from last year by 2.1 per cent to 39,687, deal volume rose 40.8 per cent to a record US$4.6 trillion (S$6.5 trillion), based on preliminary Thomson Reuters data, as big companies pursued their dream matches.
Most of the obvious mega deals had been explored already, investment bankers and lawyers said. But the number of transactions could increase next year as newly merged companies sell non-core assets, and smaller companies consider tie-ups to stay competitive, they noted.
"While the absolute dollar value of deals could very well decline in 2016, we expect the number of deals to increase year on year as the market broadens and we see more mid-sized transactions," said Mr Gary Posternack, global head of M&A at Barclays.
While the absolute dollar value of deals could very well decline in 2016, we expect the number of deals to increase year on year as the market broadens and we see more mid-sized transactions.
MR GARY POSTERNACK, global head of M&A at Barclays
The number of deals this year that exceeded US$30 billion in value was 18; together, they made up a quarter of the year's total volume. This compares with seven deals worth more than US$30 billion last year, and one in 2013.
M&A IN NUMBERS*
$160 billion: Pharma giant Pfizer's deal for Allergan was the largest this year and second-largest on record
$120 billion: Merger of chemical conglomerates Dow Chemical and DuPont was structured so that subsequent spin-offs of the combined companies' divisions would be tax-free
$106 billion: Beer-maker Anheuser-Busch Inbev acquired SABMiller in a deal dubbed "megabrew"
$70 billion: European oil giant Royal Dutch Shell's takeover of BG Group was the biggest acquisition in the sector in a decade
$2.32 trillion: Volume of deals this year in America
$1.05 trillion: Volume of deals in Asia
$879.6 billion: Volume of deals in Europe
$24.5 billion: Advisory fees from completed M&A deals worldwide
* all figures in US dollars
This year's mega deals included many with long-expected operational efficiencies, such as brewer Anheuser-Busch Inbev's acquisition of SABMiller, as well as oil major Royal Dutch Shell's purchase of BG Group .
Financial engineering was a major factor in some deals. These included drug maker Pfizer's acquisition of Allergan, a so-called inversion that would allow Pfizer to lower its tax bill by re-domiciling from the United States to Ireland.
The merger of chemical conglomerates Dow Chemical and DuPont was structured so that the subsequent spin-offs of the combined companies' divisions would be tax-free. Other drivers included acquirers' need for speedier growth, as well as their strong balance sheet and confidence that the macroeconomic environment was stable enough for them to splash out on big transactions.
"With economic growth still lagging, investors have been supportive of deals that make strategic sense and create value. The strategic rationale for M&A is more important than the price paid for it," Goldman Sachs Group global M&A co-head Gilberto Pozzi said.
The median value of deals globally as a multiple of the target's annual earnings before interest, tax, depreciation and amortisation rose 10.6 times this year, the highest since 2007, before a buyout boom ended with the global financial crisis. Combined with record deal volumes, this has raised concerns over whether the M&A cycle may be approaching its peak.
But "this is not an M&A bubble", said Mr Luigi Rizzo, M&A head for Europe, the Middle East and Africa at Bank of America. "The record value of deals this year was underpinned by the low cost of capital and the strength of the dollar."
Asia had a record M&A year, with volumes at US$1.05 trillion, up 58 per cent to date. M&A in Europe reached US$879.6 billion, up 6 per cent, in the strongest year-to-date period since 2008. Hostile bids for firms have also been getting bigger. The dealmaking boom has led to an investment banking bonanza. Fees from completed M&A advisory globally increased 5 per cent in the year-to-date to US$24.5 billion, estimates from Thomson Reuters and Freeman Consulting show.
The M&A market could slacken next year if the economy and political environment turn sour.