M&A sera sera
17 October 2005
28 November 2005
25 June 2007
27 February 2006
11 July 2005
18 July 2005
The nearing of Halloween is as good a time as any to gaze into the crystal ball and see what the spirits tell us about M&A activity in 2006. Remarkably, they seem to have retained their counsel, as the first message revealed to me is that predictions are forward-looking statements upon which you should not place undue reliance - future events and uncertainties may cause actual results to differ from those expressed or implied in those statements. So, consider yourself warned: the spirits have bespoken caution.
Actually, perhaps the better way to take a view on 2006 is to begin by looking back at M&A activity in 2005 (although past performance is not necessarily indicative of future results). According to Thomson Financial, announced deal activity through the third quarter (Q3) of 2005 was at its highest level in the past five years. With more than $1.88tr (£1.07tr) of announced global deal volume at 30 September 2005, the worldwide M&A market is up a healthy 48.2 per cent over the comparable 2004 period. The US and Europe together accounted for nearly 80 per cent of this activity, while Japan and the Asia-Pacific region contributed nearly 16 per cent of these deals. Moreover, almost all geographic regions have recorded significant growth in deal volume, with a 37 per cent increase for the US, a 75 per cent increase for Europe, a 106 per cent hike for Japan and a 30 per cent increase for the rest of the Asia-Pacific region. Although the pace of activity in Q3 has slowed slightly from Q2 levels, this looks to be a pause rather than a change in direction.
One reason for 2005's robust deal flow is the continuing activity of private equity firms. According to Mergermarket, sponsor-led acquisitions and exits accounted for 36 per cent of announced European M&A activity for the first half of 2005. The US experience is broadly similar. Relatively benign economic conditions, a low (albeit increasing) interest rate environment and receptive debt markets continue to enable financial sponsors to pursue transactions aggressively.
Financial sponsors have also been aided by larger war chests and by the trend in favour of 'club' or consortium deals, which have enabled them to spread their risk and stalk the big prey successfully. Witness the recently announced $15bn (£8.53bn) acquisition of the Hertz Corporation by a consortium consisting of Clayton Dubilier & Rice, the Carlyle Group and Merrill Lynch Global Private Equity, as well as other notable club transactions such as the €4.3bn (£2.96bn) acquisition of Amadeus Global Travel Distribution, the €2.25bn (£1.55bn) acquisition of Auna Tlc and the €1.8bn (£1.24bn) acquisition of Yellow Brick Road.
While private equity is undeniably important to global M&A activity, 2005 has also seen sustained interest in big-ticket corporate M&A. The five largest European transactions announced in 2005 through Q3 are all strategic transactions, and together they accounted for nearly 20 per cent of European M&A activity. Of particular note in European M&A is the emergence of hedge funds as 'shareholder activists', with the power to make or break transactions (as shown by the Deutsche Börse's decision to abandon its bid for the London Stock Exchange when its hedge fund shareholders objected). Of course, strategic transactions are not limited solely to Europe; the US has also seen Bank of America's $35bn (£19.91bn) acquisition of MBNA and MetLife's $11.8bn (£6.71bn) acquisition of Travelers Life & Annuity, among other corporate M&A activity.
One area where all is not so rosy is US-European cross-border M&A. Although US buyers continue to invest in Europe (notwithstanding unfavourable exchange rates), deal activity in Europe is being led by European buyers. For example, according to Bloomberg, UK-based buyers accounted for only 42.8 per cent of this year's announced UK M&A activity, while French and German buyers together accounted for nearly 26 per cent of the market. Indeed, the US contribution was just 8 per cent. The same broad trends are present in Germany, France and Italy.
Remarkably, even though European trade buyers are willing - even eager - to invest outside their home countries, they have shown almost no interest in making US investments. During the first nine months of 2005, US buyers accounted for 76.5 per cent of announced deal activity involving US targets, while the UK, the Netherlands, Germany and France collectively accounted for only 5.7 per cent of US M&A activity (based on value). Given the current weakness of the dollar, this seems extraordinary.
The reluctance to invest in the US may be driven by concerns about the aggressive litigation environment, Sarbanes-Oxley-related disincentives for share-based acquisitions in the US, or a general apprehension about investing beyond one's own backyard. I suspect the driving force is a combination of the foregoing, along with a belief that the US economy, with its yawning national debt and its ballooning current account deficit, is vulnerable and that now is not the time to take a punt on the dollar. Whatever the reason, US-European cross-border M&A does not look likely to contribute meaningfully to 2006's global deal activity.
So, as promised at the outset, here are my predictions for 2006's M&A activity. Although the market cooled a little in Q3 from the robust levels of Q2, the signs point to a strengthening of global M&A activity in the final months of 2005 and into 2006. Based on current trends, likely sectors for continuing European consolidation are energy and power, financial institutions, pharmaceuticals, telecommunications, media and consumer retail. In 2006 it will be the strategic buyer that will dominate the market. This is not bad news for the private equity investor, which will surely see plenty of opportunities to invest alongside the trade buyer (witness Pernod Ricard's acquisition of Allied Domecq and Ono's acquisition of Auna). Moreover, as activist hedge fund investors galvanise strategic buyers to pare their portfolios and divest non-core businesses, this will also create additional opportunities.
But, as with all forward-looking statements, be warned that there are plenty of known uncertainties (terrorism, a bird flu pandemic, further increases in the cost of oil and so on) that could derail these predictions. Trick or treat?
Jeremy Dickens is a partner in the London office of Weil Gotshal & Manges.