Once again, TMT tops the industry-specific M&A volume table as investor hunger for opportunities in tech continues to grow. In the first half of 2016, the sector saw 495 deals, well ahead of the next highest, Industrials & Chemicals, in which 372 transactions were made. The latter was characterized by a particular interest in petrochemicals, particularly with regards to agriculture, continuing a trend that began in 2015 with the US$130 billion merger of Dow Chemical and rival DuPont, and Bayer’s ongoing interest in US agribusiness Monsanto.
A healthy future for M&A?Headline-grabbing moves in other sectors include the US$35.2 billion megadeal that saw Ireland’s Shire PLC acquire Baxalta in January, followed by Abbot Laboratories’ acquisition of St. Jude Medical in late April for nearly US$30 billion. Those two deals, worth more than US$65 billion, account for 56 percent of the total PMB deal value for H1 2016. Alone, they amounted to more than half of the US$88 billion accrued by the other eight M&A deals in the top ten, underlining the impact of the PMB sector on deal values in H1 2016, despite the sector only being fourth in terms of volume at 250.
Given the recent innovations in healthcare technology, from mobile x-rays to long-distance diagnosis, the TMT and PMB sectors may be on course for convergence through M&A in coming years. However, according to White & Case partner William Choe, strategic partnerships or investments coupled with partnership agreements between companies are sometimes more attractive than M&A. Choe cites the example of a medical devices producer creating implants that can collect a patient’s medical data. “The data is stored in the cloud and examined with big data analytics software to provide insights for patient diagnosis and therapeutics,” he says. “Under these circumstances, a medical devices business might find it more practical to enter into commercial arrangements with cloud services and data analytics companies, rather than acquiring them. The evolution and integration of advanced technologies could drive or hinder M&A activity in different scenarios.”
Power movesThe energy, mining and utilities (EMU) sector features in the top deals of the first six months of 2016—though it is below historic highs. There were 176 deals, making it the seventh-biggest sector, possibly due to sustained low oil prices. Three large energy deals were completed in the first quarter of 2016, the largest being Great Plains Energy’s US$12.1 billion bid for utility Westar Energy, which completed at the end of May. Great Plains, the parent company of Kansas City Power & Light, will assume US$3.6 billion of Westar’s debt and boost its customer base by 1.5 million in Kansas and Missouri. The other sizeable power sector deal saw Canada’s Fortis absorb ITC Holdings. Oil and gas deals, meanwhile, are topped by midstream transactions that reflects the paucity of interest in exploration and production (E&P) opportunities. “While there’s some stress on the power side of the M&A market, this is not nearly as pronounced in upstream oil and gas,” says Gregory Pryor, a White & Case partner. “Few deals have come to the fore in the upstream oil and gas space, reflecting the general uncertainty over prices and asset values. People can only decide what to do strategically if they know where things are going to land.” The big oil and gas and E&P players have “hunkered down”, according to Pryor, cutting back expenditures and, for the most part, not pursuing targets. This situation may change. As oil prices stabilize, buyer and seller expectations could begin to align and produce an uptick. Activity may also be spurred on by chapter 11-related asset sales aiming to generate funds to distribute to creditors. Alternatively, hybrid restructuring-type M&A could step up, with creditors simply taking over the keys to these companies through the restructuring process. “For the first half of 2016, oil and gas businesses have been more focused on distressed M&A and restructuring-related M&A,” says Pryor. “That’s the real story.”
Sector watch: Tech, pharma and energy
▪ In terms of volume, TMT leads the way in the first half of 2016, with 495 deals, followed by Industrials & Chemicals at 372 deals ▪ PMB dominates the value field, although two megadeals account for 56 percent of total PMB deal value for H1 2016 ▪ Dealmakers still have an appetite for tech, with the number of deals remaining consistent, despite relatively low values
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Tech still taking holdWhile only one of the top 10 deals in H1 was technology focused, it is still very much at the fore across the board. Dealmakers still have an appetite for tech as it relates to healthcare, big data analytics and machine learning, fintech, cloud services, data security and the Internet of Things. The difference now, after the large consolidations of 2015, is that buyers seem more interested in mid-size or smaller deals, according to Choe.
As he points out, a slowdown following the tech M&A boom of 2015 is hardly surprising, as buyers reorganize their post-deal operations. However, the number of mid-size deals has been climbing in 2016, suggesting that the slowdown may be more a question of deal size than volume. An exception to the trend is Microsoft’s US$26 billion takeover of LinkedIn, announced in June 2016, one of the largest deals of the year so far in any sector. “While we have seen decreases in the total value of tech-driven US M&A in 2016, the number of deals has remained pretty stable. The megadeals that characterized this space in 2015 may not resurface during the course of this year, but the overall tech deal flow does not seem to be slackening,” says Choe. Broader emerging technology megatrends are playing a part in this process, creating new M&A demand for companies that produce enabling technologies, such as the ASIC chips that allow for machine learning. The tech M&A market comprises a complex array of integrated sub-sectors, and smaller specialized companies within these sub-sectors may prove to be very attractive. Finally, convergence will continue to push US M&A in years to come as non-tech companies become increasingly active in the tech M&A market. “Universal connectivity, the social web, big data, the cloud and, most importantly, blockchain—these have all created the perfect environment for smaller startups to be noticed,” says Hahn. “Larger companies need to decide if they want to take the time and money to build new technology offerings themselves or if they need to buy them in order to jumpstart—or just keep up with—the competition.”
A staple of some large cross-border transactions over the past few years, tax inversions typically involve a company that is subject to the US tax system on worldwide income and that is attempting to re-domicile in a foreign jurisdiction with lower tax rates. However, there has been an increasing public and political backlash over such deals. In April 2016, the US Treasury announced new measures to clamp down on inversions, making it difficult for companies to move tax addresses out of the US and then shift their profits to lower-tax domains. “Under the existing rules, an inversion generally gets triggered when the shareholders of the US entity own 60 percent or more of the new foreign parent,” says Andrew Kreisberg, a partner at White & Case. “The new rules have made it easier to cross this threshold test by, in effect, increasing the size of the US entity and decreasing the size of the foreign entity in certain situations. As a result, shares of the new foreign parent that are issued to US shareholders are deemed to constitute a larger percentage of the new foreign parent.” Does that mean tax inversions are off the agenda? Not necessarily. Smaller inversions may still be possible. “Some of the bigger deals might go away, but inversions are not gone for good” says Kreisberg. "It will be interesting to see what effect the new earnings stripping rules have on the frequency of inversions.”