Mergers and acquisitions globally exceeded $1 trillion in value in the third quarter of 2015, the third highest on record, as a stock market plunge and more expensive debt financing did not prevent big companies from going ahead with their dream deals, according to Reuters.
Concerns about an economic slowdown in China, plummeting energy and commodity prices, and the prospect of potentially higher interest rates have all fueled market volatility which, if sustained, could weigh on dealmakers’ confidence.
Yet the dealmaking frenzy has not abated. Just this week, pipeline giant Energy Transfer Equity LP clinched a stock-and-cash deal to acquire rival Williams Companies Inc for $37.7 billion, including the assumption of debt.
“The key trends that have been driving M&A – global scale, synergies, low financing costs, strong balance sheets – continue to be there, and I think they will continue to drive M&A activity into 2016,” said Larry Hamdan, head of mergers and acquisitions for the Americas at Barclays Plc.
While the number of deals around the world dropped to 8,989 in the third quarter from 10,614 a year ago, their volume totaled $1.02 trillion, up 11 percent year-on-year, according to Thomson Reuters data. Only two quarters, the second quarter of 2015 and the second quarter of 2007, have recorded higher volumes, at $1.29 trillion and $1.41 trillion, respectively.
The year-on-year rise in transaction volumes was due to big deals. Among them was Allergan Plc’s acquisition of Teva Pharmaceuticals Industries Ltd’s generic drug business for $40.5 billion, Berkshire Hathaway Inc’s purchase of aerospace equipment maker Precision Castparts Corp for $37.2 billion, and ACE Ltd’s acquisition of property and casualty insurer Chubb Corp for $28.3 billion.
A key difference with previous quarters has been the cooler reception of some deals by stock market investors. Shares of acquirers are no longer rising indiscriminately on the day their deals are announced. When Energy Transfer announced its deal on Monday, for example, it its shares dropped 12.7 percent.
“Investors tend to be more supportive of well thought out transformational deals, and expect management teams and boards to have done their homework before coming to market with large-scale acquisitions,” said Dag Skattum, vice chairman for Europe, the Middle East and Africa at JPMorgan Chase & Co .
As a result, acquirers became more cautious in the quarter about upsetting their investors with a potentially pricey deal.
For example, business research provider IHS Inc said on Tuesday it would not pursue an acquisition of software maker Solera Holdings Inc, four days after Reuters reported that IHS was working with investment banks to submit a bid. IHS was phased by a 5.8 percent drop in its share price following the Reuters report, as well as pricier debt markets, according to the sources.
Dealmaking has remained brisk across all sectors of the economy. Despite the tumult in energy prices, M&A activity in the energy sector has accounted for 15 percent of overall dealmaking year to date, followed by healthcare with 14 percent and technology with 10 percent. M&A advisory fees for investment bankers have increased 9 percent year-to-date to $18.2 billion.
Dealmaking was up year-on-year across all regions, with M&A in the Americas reaching $618.3 billion, the highest since the second quarter of 2007, when it reached $687.8 billion.
Some dealmakers argued that some of the economic headwinds could in fact provide a boost to deals. A slowdown in emerging market economies, for example, is driving some companies to seek growth in the United States through acquisitions.
“China’s economic slowdown is not curbing enthusiasm for dealmaking, quite the contrary. It pushes people to do deals to offset subdued growth,” said Severin Brizay, head of M&A for Europe, the Middle East and Africa at UBS AG.
A drop in the value of the shares of companies could also be a catalyst for M&A if it helps narrow valuation expectations between sellers and buyers.
“I think if the stock market declines a little bit, this could enhance M&A deal volumes. It could cause some people to get off the sidelines as their prized asset becomes more attractive from a valuation perspective,” said Robin Rankin, co-head of global M&A at Credit Suisse Group AG.
To be sure, the market volatility could, if protracted, weigh on the confidence of company chief executives, reducing their appetite to take risks with M&A. It could also reduce the number of mega deals that have dominated the M&A landscape this year.
“The number of stock-for-stock deals as a percentage of all M&A deals will likely decline somewhat as a result of the market volatility, and we are likely to see fewer mega deals overall as well because these have a significant stock component,” said George Casey, head of Shearman & Sterling LLP’s global M&A group. (Source: Reuters; Reporting by Greg Roumeliotis in New York and Pamela Barbaglia in London; Editing by Lisa Shumaker)