Allen & Overy’s index reveals uneven recovery in M&A markets

Allen & Overy’s latest M&A Index has revealed that the recovery in M&A activity predicted at the beginning of 2013 has failed to materialise.

According to the index, figures are down; however, a deeper analysis reveals new pockets of activity emerging: 

  • The US continues to be the most active M&A market
  • Spain shows signs of recovery
  • Intra-regional deals dominate the Asia-Pacific market

The activity in the final quarter of the year dropped 39 per cent to 468 deals and value fell 56 per cent to $313bn (£190bn) compared with the same period last year. For the year 2013 as a whole, the number of deals fell by 14 per cent for both value and volume of deals, with 2,263 deals worth $1.83tn (figures are based on research on $100m global M&A deals).

However, according to Allen & Overy, as investor priorities and sentiment change, the market needs to be looked at through different lenses. This year could see M&A activity significantly increase, as it is now highly likely that interest rates will go up and the end of cheap funding is in sight.

The US continues to be the liveliest of the M&A markets: in the fourth quarter (Q4) it accounted for 32 per cent of all activity by volume and 39 per cent by value, despite a year that was marked by budget impasse and widespread anxiety about the end or reduction of the Federal Reserve’s monetary stimulus programme. This reflected a growing confidence in the economic recovery taking hold, with companies focusing on bolstering core business activities and disposing of non-core assets. Examples include the Novartis sale of its blood transfusion diagnostics business unit to Grifols for $1.7bn and AIG’s sale of its aircraft leasing unit for $5.4bn to AerCap.

The UK still ranks as the second most attractive market for foreign buyers in 2013 and confidence is improving, but there are still signs of aversion to risk, as deals have become smaller in value. The average deal value in Q4 2013 has gone down by 27 per cent compared with the same quarter last year, from $721m to $523m.

Much of Europe, with the exception of the UK and Germany, remains in a state of recession or low growth. With 556 deals completed, 2013 was the quietest year since 2009 in Western Europe. However, in Spain the M&A market is showing signs of gradual recovery. Excluding deals in the financial sector, driven by the restructuring of the Spanish banking system, the number of deals still increased by 24 per cent in 2013, while deal value was up by more than 50 per cent.

In 2013, US and European capital flows were directed more towards domestic deals: in the UK there was a 20 per cent increase in domestic deals. Capital flows towards emerging markets slowed as companies have been taking stock of the changing economic situations in those markets. One of the consequences of this was the virtual ring-fencing of the Asia-Pacific region, where intra-regional deals now dominate.

Dirk Meeus, co-head of the global corporate practice at Allen & Overy, said: ‘The lesson learnt in 2013 is that history does not repeat itself and that predictions in a post-crisis environment are harder than ever to make. Different regions and sectors will return to growth at different speeds and 2014 could become a year of opportunities: companies are cash rich and the Fed and the Bank of England have announced that interest rates will go up gradually as they start tapering, so it would be logical for companies to start acting now, before interest rates go up and while borrowing is still cheap.’