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.