In the first six months of the year, the US market delivered US$753.3 billion worth of deals, up from US$598 billion in H1 2014. US M&A is on pace to post its best performance since 2007.
John Reiss Partner, White & Case
Gregory Pryor Partner, White & Case
Activity has been supported by an incredibly friendly deal environment. The US economy is stable and has grown for each of the last five years. Interest rates remain low, which has allowed for cheap and plentiful financing. Corporates and private equity firms have accumulated substantial cash piles, and shareholders and investors are eager for boards to use this capital to deliver growth and make large strategic acquisitions. It is estimated that US corporates have US$1.4 trillion of unused cash at their disposal, and private equity firms are sitting on US$1.3 trillion. Megadeals in the technology, media and telecommunications (TMT), healthcare and pharmaceutical sectors, such as the US$55 billion deal between Charter and Time Warner Cable, Anthem’s US$54.2 billion acquisition of Cigna and Mylan’s US$27 billion move for Perrigo, have been a feature of the market for more than 18 months now. There has seldom been a better set of circumstances to support dealmaking.
As robust as US deal activity is, however, the big question is whether this bull run can be sustained. Valuations have soared alarmingly, with average prices now sitting at 16x EBITDA.
Also worrying is the fact that the rise in deal valuations is not matched by a similar increase in the number of deals initiated. Deal values have been skewed by a handful of megadeals in a small number of sectors. If the surge in megadeals does ease, overall deal values could fall sharply in H2.
Recent stock market volatility, uncertainty in the financing markets and anticipated interest rate increases in the fall could put a break on M&A too. If stock prices fall for a sustained period of time, enthusiasm for deals among buyers is likely to decline, particularly because it may take a while for sellers’ expectations to adjust to new price realities. A mismatch between buyers’ and sellers’ expectations would negatively affect M&A activity.
New investments from private equity firms will also need to increase if current momentum is to be sustained. Private equity buyouts are down from 2014—many firms feel that deals are too expensive and that it is very difficult to compete with cash-rich corporates. After a record run of exits in 2014, both the number and the value of private equity deals are down.
US M&A markets are strong, but challenges remain for dealmakers and advisors. The number of mid-market deals needs to increase before it can be said that the market has made a full recovery. The high multiples paid for assets is also a concern, and stock market volatility could create a meaningful difference in price expectations between buyers and sellers.
The boom continues