US M&A bounces back after shaky start
With the uncertainty that defined 2016, expectations for the year may have been muted. However, despite the relatively slow deal activity across the first nine months of 2016, the US M&A market delivered another strong year following a string of bulge bracket deals in October and November.
In 2016, US M&A deal volume fell a bit to 5,084 deals from 5,293 in 2015. Deal value was down more substantially, from US$1.9 trillion in 2015 to US$1.5 trillion. Despite this yearly fall, US dealmaking on the whole was still high by historical standards.
October, in particular, saw a material uptick in big-ticket transactions, including AT&T’s US$105 billion deal to acquire Time Warner and CenturyLink’s US$34.5 billion takeover of Level 3 Communications. According to Mergermarket, six of the ten largest deals in the US in 2016 were announced in or near Q4. In October alone, US$254.8 billion worth of US M&A was recorded. By 2016’s end, H2 value had outstripped H1 by 52 percent.
“The last year was up and down a bit. We had a good quarter and then a not so good quarter, then a good quarter. But overall, it was a strong year for M&A,” says John Reiss, global head of M&A at White & Case. “2016 went forward in the face of some uncertainty, but the uncertainty was always very temporary and quickly abated.”
Given the attractiveness of the US relative to other jurisdictions, US M&A seems to be coalescing around the domestic and inbound markets
Deal drivers Yet despite a somewhat sluggish year for deals through Q3 and uncertainty following Donald Trump’s victory in the Presidential election, M&A boomed in the final quarter of the year. US stocks have climbed since the vote, with the S&P 500 up 7.4 percent in the month since the election. Markets appear to have shrugged off concerns about cross-border trade and responded positively to Trump’s plans to increase growth by cutting taxes, investing in infrastructure and lowering the tax burden on corporate cash repatriated to the US from abroad. “Trump’s platform is extraordinarily pro-business, from the rolling back of regulation to fiscal stimulus to tax changes, both in terms of tax rates and repatriation opportunities. Those policies create a lot of confidence, and confidence helps the stock market and helps M&A,” says Reiss. (See more on Trump). In addition to strong stock markets, steady economic growth in the US has also given dealmakers the confidence to continue pursuing transactions despite political change, with the World Bank forecasting GDP growth of 1.9 percent for 2016, rising to 2.2 percent in 2017. By contrast, GDP growth in the Euro Area is expected to stay at 1.9 percent in 2017. The key strategic drivers for steady M&A—supplementing low organic growth with deals, improving margins through synergy, and cheap financing and confidence—remain firmly in place for all corporates. “The fundamental drivers energizing the US M&A market in the past two years remain in place. If the new administration and Congress successfully executes its pro-business agenda, and doesn’t otherwise create unnecessary uncertainty, we can expect US M&A activity to continue its robust pace,” says Gregory Pryor, US head of M&A at White & Case.
Consolidation stations The strategic importance of M&A is clear to see in some of the biggest deals in the US in 2016. AT&T’s US$105 billion deal to acquire Time Warner is the latest transaction in the TMT sector, where the rapid convergence of telephony, wireless, broadband and television has made M&A essential as companies seek to acquire spectrum and meet customer demands.
German chemical giant Bayer AG’s US$63.4 billion deal for US-based Monsanto, meanwhile, is driven by consolidation in the chemicals industry where there is a rush to build scale and secure revenues in a low-growth sector. Key deals include Canadian pipeline business Enbridge acquiring US counterpart Spectra Energy Group for US$41.4 billion, as well as Great Plains Energy’s US$12.1 billion takeover of Westar Energy and Fortis’ US$11.3 billion acquisition of ITC.
The Trump ultimatum Donald Trump’s victory in the US Presidential election caught many by surprise, and M&A markets are still trying to make sense of what a Trump Presidency means for the economy and for dealmaking. Although there are elements of uncertainty around, initial indications strongly suggest that the overall impact of the new President’s policies will strongly favor business and M&A. “I’m not sure anybody knows what to expect, but if you look at some of Trump’s appointments to date, there are a number of people who have been very successful in business,” says White & Case partner Mort Pierce. “Also, Trump has said that he’s going to cut back on regulation, which will benefit a number of companies and potential deals. Trump is a businessman and I believe his administration will be pro-business.” The new administration and Congress have signalled their plans to stimulate growth by cutting taxes, encouraging corporates to bring cash held abroad back into the US and soften Dodd-Frank banking rules. If implemented, such pro-business measures are likely to support M&A activity. In particular, Trump’s plans to reduce the taxation of overseas cash holdings repatriated to the US could be a game-changer if they go ahead. Moody’s Investors estimates that corporate America has around US$1.3 trillion of “trapped cash” held abroad. If this capital was returned to the US, it is possible that much of it could be deployed in M&A. The new President’s plans to increase investment in infrastructure could also boost M&A in the sector, particularly in the energy space. “Infrastructure in midstream oil and gas and power is set to really take off. There are a number of deals that stalled or were canceled during the Obama administration that could very well go forward under the Trump administration,” says Jason Webber, a partner at White & Case. “Obviously these include both the Keystone XL and Dakota Access pipelines, which President Trump recently put back on the table by Executive Order,” he adds. Conversely, however, there are concerns that Trump’s plans to cut taxes and increase infrastructure could see inflation and interest rates rise, which will make financing for deals more expensive. Campaign rhetoric could discourage foreign buyers from pursuing US-based acquisition targets. So far there have been no signs of inbound M&A slowing, but some inbound investors may pause to see what Trump does in office before pursuing deals. Other populist statements from the new President could also give dealmakers, both foreign and domestic, reason for some caution. “There is some uncertainty as the new President takes office. It wouldn’t be a surprise for dealmakers to get a read on the new administration over the first quarter before jumping in,” says White & Case’s Greg Pryor.
Home and away The year’s largest deals demonstrate the importance of cross-border activity involving the US. Indeed, inbound dealmaking into the US has held steady through 2016, with volumes increasing to 970 deals from 924 deals in 2015. Inbound deal value rose marginally from US$444.1 billion in 2015 to US$451.6 billion this year, and Q3 deal value of US$190.8 billion represents the highest quarterly inbound deal value in over five years. Deals such as Bayer AG’s play for Monsanto and Irish pharma group Shire’s US$35.2 billion acquisition of Baxalta Corp show that the US remains a highly attractive destination for overseas M&A investors. This is especially pertinent given a cooling economy in China, unattractive risk-adjusted returns in other emerging markets and uncertainty in Europe—both in terms of Brexit and the impending crunch elections in major economies such as France, Germany and the Netherlands.
Neighboring Canada was the most active inbound investor in the US, leading in volume and value with 155 deals worth US$110.6 billion in 2016. Notable, high-value Canadian deals included the aforementioned Enbridge and Fortis acquisitions. The UK was ranked second in terms of volume, with 141 transactions, but was only fifth in the value rankings (US$28.4 billion), behind Canada, Germany (US$84.4 billion), China (US$63.6 billion) and Ireland (US$45.5 billion). However, it should be noted that German and Irish figures are skewed by Bayer AG’s US$63.4 billion acquisition of Monsanto and Shire’s US$35.2 billion deal for Baxalta Corp, respectively. China, meanwhile, also ranked in the top five of the volume standings, with 79 deals. Despite CFIUS objecting to both Philips’ US$2.6 billion sale of its lighting components business to a Chinese-led consortium and chip manufacturer Aixtron’s US$547 million sale to China’s FCG, only Canada, the UK and Japan (91) accounted for more inbound deal volumes. One large Chinese takeover saw electrical appliance manufacturer Qingdao Haier buy GE Appliances from General Electric for US$5.6 billion. Given the attractiveness of the US relative to other jurisdictions, US M&A seems to be coalescing around the domestic and inbound markets. Indeed, outbound deal volumes for the period fell from 1,399 transactions in 2015 to 1,259 deals in 2016. The uncertainty caused by the UK’s Brexit vote—and its impact on the wider EU block—is another factor that has slowed outbound dealmaking. The UK is the most active market for outbound US deals, accounting for 266 deals in 2016. UK volumes were significantly higher than the 173 outbound deals targeting Canada. Germany, with 91 deals, and France with 69, were the next most popular countries for outbound deals, underscoring the importance of the UK and Europe to outbound US M&A. Overall outbound deal value data also demonstrates how key Europe is for US investors pursuing cross-border deals. The UK led the rankings with US$63.3 billion worth of deals. The Netherlands came next with US$49.4 billion worth of deals, a figure inflated by Qualcomm’s US$45.9 billion bid for Dutch semiconductors business NXP Semiconductors.
A slow first half, regulatory activism and political uncertainty did not stop US M&A activity
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Pause for effect A number of factors contributed to weaker M&A data for the first three quarters. During 2016, stock prices of acquirers fell following deal announcements, suggesting that investors were reacting more cautiously to acquisitions in recent periods. For example, pharma group Pfizer’s US$183.7 billion agreement to acquire Allergan was called off after the US Treasury tightened up rules on so-called tax inversion deals. Oil groups Halliburton and Baker Hughes abandoned a US$37.2 billion merger after opposition from antitrust authorities. Additionally, the emergence of regulatory activism impacted the progress of certain foreign investments. For instance, the Committee on Foreign Investment in the United States (CFIUS) objected to Philips’ US$2.6 billion sale of its lighting components business to a Chinese-led consortium as well as chip manufacturer Aixtron’s US$547 million sale to China’s Fujian Grand Chip Investment Fund (FCG).
The CFIUS effect The Committee on Foreign Investment in the United States (CFIUS), established to review the effect of deals by foreign buyers on US national security, was an influential player in M&A in 2016. There were a couple of noteworthy deals that were abandoned in the wake of CFIUS objections. Philips NV called off the US$2.6 billion sale of its lighting components business Lumileds to a Chinese-led consortium after CFIUS said that it would recommend that the President of the United States block the transaction if the parties did not abandon the deal. President Obama subsequently blocked the acquisition of German-based chip equipment manufacturer Aixtron’s US business by China’s Fujian Grand Chip Investment Fund, which led to the parties terminating their overall US$547 million transaction. This was only the third time that a President has prohibited a transaction, and the first ever pre-closing Presidential block order. “It has been a remarkable year,” says Farhad Jalinous, a partner at White & Case. “CFIUS has confirmed what we have been seeing, which is that 2016 has been an extremely busy year for them. The number of filings have been at really high levels throughout the year. It sounds like there was even an acceleration in the number of filings towards the tail-end of the year.” Furthermore, Jalinous observes, there are indications that the CFIUS review process could be poised for some kind of update or revision. These include a new President who campaigned strongly on protecting US business, a number of letters from members of Congress requesting CFIUS attention and, in some cases, action regarding specific deals, and a recommendation from the US-China Economic and Security Review Commission to congress to modify the statute to give CFIUS additional powers to restrict certain inbound investments from China. If any such modifications do come to pass, they would most likely require a statutory amendment, which could take years. “The last time that the statute was actually amended, it took a couple of years. That was the Foreign Investment and National Security Act of 2007,” Jalinous says. “The modification to the statute does take some time and you have to keep in mind that the regulations under the updated statute then also need to be promulgated.” Jalinous believes, however, that the increase in the volume of deals CFIUS has to process will have the most significant impact on M&A in the year ahead. “The formal CFIUS process is pretty much set by the statute and regulations, but the timing of some of the steps in the process, where CFIUS has discretion in how it processes material that has been submitted, has been impacted,” Jalinous says. “Before the rigid timelines set in, there is the pre-filing phase where you submit a joint filing in draft to the Committee for them to review and provide feedback before you formally file. This process has become much more extensive and can now take weeks or in some cases longer. The time between a formal submission and the acceptance of a filing, which actually starts the clock, has also been prolonged. A lot of it is being driven by the sheer volume that is coming in and what the CFIUS staff have to manage.” Other countries have also been adopting and in some cases expanding procedures to review the national security implications of transactions impacting their jurisdictions. As a result, considering CFIUS-like processes in a variety of countries is becoming an integral part of multinational cross-border deal planning. “More and more jurisdictions around the world are either setting up or strengthening their regulatory or statutory authorities for review of inbound foreign direct investments from a national security perspective,” Jalinous says. “When we have a cross-border deal coming in from the Far East, for instance, we’re not only doing a CFIUS analysis. We’re doing a German analysis, French analysis, Italian analysis, Australian analysis, Canadian analysis, etc. based on where the target has assets. That is really the clear trend of these cross-border deals. These reviews may start with CFIUS, but it’s becoming more of a global issue that needs to be addressed in multinational cross-border deals.”
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