HEADLINES

After a period when there seemed to be a slowdown in the US M&A market, dealmaking is back.

While 2013 gave hints of a recovery, the first six months of 2014 have marked a real turning point for US M&A. Deal values have reached a five-year high, and volumes have climbed by nearly a third compared to the same period in 2013. 
There were 2,329 deals worth US$694 billion in the United States in H1 2014, a 30 percent increase in volume and a 98 percent rise in value when compared with H1 2013. 
On a quarterly level, the data is also encouraging. Values have increased quarter-on-quarter for the last three quarters, the first such instance since 2012. Indeed, the four quarters from Q3 2013 to Q2 2014 saw deal volumes break the 1,000 barrier in each time period—the first time this has happened in the last five years.
This sustained increase has been due, in part to a greater prominence of domestic deals. There were 2,026 domestic deals in H1 2014, a 35.5 percent increase on 1,495 deals in H1 2013. Both Q1 and Q2 2014 generated more than 1,000 domestic deals each, the first time a quarter has hit 1,000-plus domestic deals since Q4 2012.
”The fundamentals have been in place to support an increase in M&A and the market has expected M&A to return for a few years now. What is surprising is how fast the market has suddenly turned,” says White & Case partner Gregory Pryor.
Deal drivers A stable macroeconomic backdrop and broad support from shareholders for companies to pursue deals again have laid the foundation for the deal resurgence.
World Bank figures show that the US economy has been growing for each of the last four years. Debt markets are also functioning better, with leveraged loan issuance reaching record levels in 2013.
On top of this, confidence in stock markets has grown as the S&P 500 gained 23 percent over the last 12 months.
“Growth rates are generally better in the United States than in other parts of the world,” says White & Case partner Oliver Brahmst. “It is the largest market on the planet. Even if China overtakes it, the United States will always hold a lot of strategic value for companies.”
The reemergence of the megadeal in the United States has supported the increase in overall deal values and suggests that businesses are feeling more comfortable making large, long-term strategic investments. 

Mega activity There were 69 megadeals in Q2 2014, the highest volume of deals worth US$1 billion or more in the last five years. Dealvolumes have increased sharply in the US$1 – 5 billion bracket and US$5 – 10 billion bracket. And while the number of US$10 billion-plus deals hasn’t risen at the same pace, the overall spike in high-value deals has provided a significant boost to overall deal value. 
“Tax inversion strategies and synergistic opportunities have been driving large deals in sectors such as pharma and technology, media and telecommunications (TMT),” Pryor says. “These issues have been driving megadeals. The companies involved feel confident enough to make big bets.They would not be doing this without that level of confidence.” For example, the two largest deals in the United States in H1 2014—Comcast’s proposed takeover of Time Warner Cable and AT&T’s pending purchase of DIRECTV, with a combined value of US$134 billion—were consolidation deals in the TMT space. For more on the TMT and pharma sectors, see Sector watch
The United States is the largest market on the planet. Even if China overtakes it, the United States will always hold a lot of strategic value for companies.
Oliver Brahmst, partner, White & Case
Equity rise The rise in equity being used in deals also points to greater confidence in markets as a driver. The number of deals in which sellers accepted equity as part of consideration has been rising steadily since mid-2013, and rose in Q2 2014 to 21 percent, the highest percentage recorded in the last six years. While not definitive, this trend suggests that corporates are happier about prospects for public companies, and expect acquirer stock prices to rise. 
“With market caps as high as they are, doing an all-cash M&A deal is risky for a CEO,” says Brahmst. “It’s just not as risky using equity if you are doing a high-price acquisition.”
59 percent of acquirers’ stock rose immediately post-acquistion in H1 2014, the highest figure in five years
Fair share Support from shareholders has underpinned this confidence. In the past, when acquirers have made a bid, their share prices have often reacted negatively to reflect the transactional risk, while the target’s share price has usually increased in anticipation of a deal premium.
Since 2012, however, acquirer share price increases on the day after a deal announcement have outweighed acquirer share price decreases, reversing a three-year trend. So far in 2014, 59 percent of acquirer share prices have risen immediately post-deal, the highest percentage in the last five years.
“There is an appetite among shareholders for companies to think about growth and expansion again and look beyond restructuring and cost cutting,” according to Pryor. “It has helped that the transactions this year have been marketed as strategic deals rather than opportunistic ones, which perhaps differentiates this market from the frothy pre-crash days.
“There was some skepticism toward megadeals, but what shareholders are seeing now are deals that address long-term strategic issues,” Pryor adds. “The perception is that deal rationales are a lot more solid.”
Indeed, strategic M&A has been a key driver of many of the United States’ biggest deals this year. As well as the Comcast and AT&T acquisitions, foreign buyers have looked to the United States to gain a tactical upper hand. For example, when Japanese beverage producer Suntory bought out spirits maker Beam Inc. for US$15.5 billion in January this year, it stated the company’s aim was now to “achieve growth in markets worldwide, including the US, the world’s largest spirits market.”
Challenges ahead Although US M&A activity has enjoyed a resurgence in 2014, the deal recovery still faces a number of risks and challenges. 

“Europe is still an issue, and economic growth in Asia is slowing down. Geopolitical uncertainty in Eastern Europe and the Middle East could also weigh on confidence,” says Brahmst. “However, that said, CEOs seem to be generally less concerned about macroeconomic and political issues that weighed on them as recently as a year ago, such as the EU crisis, military flashpoints and the stalemate in Washington.” 
Additionally, the encouraging deal figures for H1 2014, especially in terms of value, should be greeted with a degree of caution because of the influence of oversized transactions.
“US M&A is certainly in a stronger place than it was a few years ago, but I would view the activity figures with some caution,” Pryor says. “Overall deal values have been pushed higher by the headline-grabbing megadeals, perhaps more than a fundamental rise in deal flow. Volumes are up, but not to the same degree as values, and the worry is that if there is any kind of threat or slowdown to megadeals it could slow the rest of the market.” Indeed, while H1 2014 activity comfortably outstripped its 2012 counterpart, Q2 2014 deal volumes actually fell 2.8 percent when compared with Q1 2014.
“We also need to watch out for one of the megadeals failing to deliver what was promised,” adds Pryor. “If one of these deals busts, there may be a cooling of activity as the market questions whether other deals will work.”  
Competition concerns may also inhibit the growth in dealmaking activity. For instance, Dollar General Corp’s recent US$8.95 billion bid for rival Family Dollar Stores was rejected out of hand on the basis of not wanting to get to the antitrust stage. “We will not jeopardize the Dollar Tree deal for a transaction with Dollar General that has a high likelihood of not closing due to antitrust considerations,” said independent director on Family Dollar Stores’ board Ed Garden at the time.
This is an issue that has become even more salient in the TMT sector, where consolidation of markets has been a key driver for M&A activity. For more on TMT, see Sector watch, page 7. Federal Communications Commission (FCC) Chairman Tom Wheeler has recently indicated that the FCC would continue to be skeptical about wireless mergers. Indeed, the demise of the proposed Sprint and T-Mobile merger has been attributed to regulatory opposition.
Pharma, medical and biotech was the second active sector in H1 2014
The US M&A market roars back to life
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US deal values reached a five-year high in H1 2014 Deal volumes have risen by a third in comparison with the same period last year Stable economy and backing from shareholders have been the foundations for the rise in M&A Megadeals have seen the sharpest rise with 69 such deals in Q2 2014—the highest volume of deals worth US$1 billion or more in the last five years Technology, media and telecommunications, and pharma, medical and biotech are the most active sectors