By the end of 2015, US M&A deal value reached US$1.98 trillion—surpassing the previous record set in the pre-crisis days of 2006.
John Reiss Partner, White & Case
Gregory Pryor Partner, White & Case
As the dust settles from the explosion of US M&A activity in 2015, it is fitting to reflect on the forces that fueled the boom and consider what last year’s trends may tell us about the year ahead.
The record year resulted in part from trends that typically drive activity when M&A surges. Momentum from 2014 set the stage for M&A to reestablish itself as a primary tool for achieving strategic business and financial objectives. Many acquirers sought to jumpstart revenue growth by expanding into new markets, products and businesses. Others sought to capture scale and synergies, spurred by trends toward consolidation and convergence—particularly in sectors with significant sunk costs such as pharma, medical and biotech (PMB). Many sellers sought to shed assets to focus on core businesses, and private equity firms exploited high valuations to cash out investments.
But 2015 stands apart because a number of additional trends converged to bolster confidence and inspire risk taking among deal makers. The US economy continued its steady expansion for the sixth consecutive year while unemployment levels continued to fall. Most buyers could obtain favorable debt financing. Corporates and private equity firms amassed huge cash reserves that were available for investment—with aggregate cash piles reaching US$1.4 trillion for corporates and US$1.3 trillion for private equity firms. And for much of the year public shareholders continued to reward management teams that used cash reserves for acquisitions.
Some of these trends are continuing, but there are reasons to look forward with caution. Although overall deal value surged in 2015, the number of deals declined. The market was dominated by megadeals—and a decrease in megadeals could impact deal values in 2016. Pricing is another concern. US targets worth more than US$1 billion carried a median valuation multiple of 15.4 times EBITDA, according to Mergermarket data. This raises questions about just how much longer the bull run can continue.
It may also be getting more difficult for some companies to access cheap financing. Although debt remains relatively inexpensive, regulated banks have pulled back on issuance of leveraged loans. And shareholders may be getting more cautious, with several deals in the second half of 2015 resulting in share price deterioration for the buyers following their announcements.
Moreover, as we go to press in January, global markets are again experiencing substantial downward pressure and volatility. This could make it more difficult for buyers and sellers to agree on value, which would negatively impact M&A activity.
Although US M&A reached a record annual high in 2015, the market was skewed toward megadeals, and emerging trends may suppress activity going forward. We will need to see stability in the financial markets for M&A to continue at 2015 levels.