As was the case in 2014, the TMT and pharma, medical and biotech sectors accounted for the lion’s share of overall deal value. TMT deals led the way, with US$233.6 billion worth of transactions in the first half of 2015, a US$90 billion year-on-year increase. Pharma, medical and biotech saw deal value increase from US$104 billion in H1 2014 to US$144 billion in H1 2015.
The number of deals in these sectors, however, was lower in 2015 compared to 2014. TMT deal volumes fell 20 percent to 449 transactions in the first half of 2015. Pharma, medical and biotech deals dropped slightly to 244 deals from 246 deals in H1 2014. Industrials and chemicals delivered 358 deals, the second-most productive sector behind TMT, but this was down by 21 percent compared to H1 2014.
The strong deal value but lower number of deals in the TMT sector reflect a market where a handful of strategic megadeals by large players have dominated activity. The rapid growth of wireless devices and the increase in consumption of content on these devices has pushed up demand for broadband capacity, which in turn has driven convergence between telephony, broadband and television. Corporates are making large strategic deals so that they can bundle these services together, consolidate customer bases and provide so-called over-the-top content (OTT), which involves the delivery of audio, video and other media via the Internet free of multiple-system operators that would control the flow of content. Verizon’s US$4.4 billion takeover of AOL, for example, was driven by this trend.
Sector watch: The usual suspects lead the way in M&A
▪ TMT was the most active sector in H1 2015 with 449 deals ▪ TMT was the most valuable sector with US$234 billion worth of deals – a US$90 billion year-on-year increase ▪ TMT deals driven by convergence and innovation ▪ Pharma, medical and biotech sector saw deal value increase from US$104 billion in H1 2014 to US$144 billion in H1 2015 ▪ Megadeals dominate in the TMT and pharmaceutical sectors ▪ Volatile oil prices are creating uncertainty in the oil and gas sector
But although telephone, broadband and TV providers still need to acquire the spectrum and scale to capitalize on the convergence between mobile, content, broadband and telephony, a shrinking pool of potential targets and antitrust concerns could see activity cool.
“The strategic reasons for doing a deal are still valid, but there are fewer targets. There are also competitive concerns, as seen with the unsuccessful attempts from AT&T to buy T-Mobile and Comcast to buy Time Warner Cable,” says White & Case partner Dan Dufner.
Dufner adds, however, that non-traditional players like Amazon and Facebook could make moves in the TMT space, while foreign players like France’s Iliad and the UK’s Liberty Global could invest without the level of antitrust and FCC restrictions faced by domestic players.
The demand for broadband has also stimulated activity in the semi-conductor sector, where corporates have moved to find cost synergies in order to remain competitive, as demonstrated by the US$40 billion merger between NXP and Freescale.
In the pharma, medical and biotech sector, large deals like Pfizer’s US$17 billion acquisition of Hospira, Mylan’s US$27 billion bid for Perrigo, and CVS’s US$12.9 billion purchase of Omnicare continue to drive activity. In 2014, tax inversions stimulated M&A, as US players looked to acquire foreign rivals in order to shift their headquarters to lower tax jurisdictions. The US Treasury tightened up the rules for tax inversions last year. Tax inversions are still an option for pharmaceutical companies, but most pharmaceutical deals in 2015 so far have been driven primarily by more strategic considerations.
“Tax inversions are still an option, but if you look at the landscape there are not as many tax inversions around as last year,” says White & Case partner Mort Pierce. “Even when a tax inversion has been one of the reasons for doing a deal, delivering synergies and replenishing pipelines have always been the main drivers.”
Pierce adds that even if there are fewer megadeals between large pharmaceutical companies, the dynamism of the sector means that there will always be attractive M&A targets available.
“There are large numbers of new companies researching and developing new drugs. A company can go from a start-up to a multi-billion-dollar business overnight, and as long as these companies are still emerging, then M&A activity will remain strong,” Pierce says.
Dufner, who advised health insurance company Anthem on its US$54.2 billion pending acquisition of Cigna, says M&A across the wider healthcare market is likely to be buoyant.
“For healthcare insurers, doctors’ groups and hospital groups, the bigger you are, the more customers you have and the more leverage you can gain in negotiations with suppliers. I think we are going to continue to see a lot of M&A across the whole healthcare sector,” Dufner says.
The energy sector could also deliver interesting opportunities. There were only 154 deals in the sector in the first half of 2015, worth US$79.1 billion. A volatile oil price, which fell from more than US$100 a barrel to about US$50 in the last year, was the main reason for the slowdown.
“When there is uncertainty around the oil price, it is very difficult for buyers and sellers in the oil & gas sector to agree on valuations. Sellers do not want to sell at the bottom of the market and that impacts negatively on deal flow,” says White & Case’s Gregory Pryor. “When the market levels off and companies have more clarity on longer-term commodity pricing, we could see valuation expectations start to match up and a recovery in dealmaking. For now, I think the focus is on pinching the pennies and saving money wherever possible.”
Anticipated restructuring deals did not materialize either, as companies were able to raise equity from investors and were protected by hedges. But now that hedges have unwound and investors have been tapped, companies no longer have a buffer and may have to open the door to an acquisition in order to survive.
“For those companies with debt on the balance sheet, as hedges unwind and the cash impact of the pricing declines are felt, something will have to be done to fund debt repayment, which could lead to more distressed dealmaking,” Pryor says.
“The electric power sector could also see an increase in activity in the second half of 2015. Indeed, a number of power assets went to auction over the summer,” says White & Case partner Michael Shenberg.
SHARE THIS ARTICLE
Meet our partners
SHARE THIS ARTICLE
CFIUS reality check: Seven insights for Chinese investors
US M&A market proves a record 2014 was no one-off