Across the globe, experts predict mergers and acquisition (M&A) activity to grow in the first half of 2016. The expected growth is fueled in part by recovering economies, steady global interest rates, and quantitative easing (QE) measures by the European Central Bank.
The anticipated growth continues the trend set in the first half of 2015, when M&A deals reached an all-time high¹ and broke the previous records set in 2007, just before the global recession.
Of course the experts’ crystal balls can only see so far into the future. While 2015’s success is expected to set the stage for the first half of 2016, the increasing volatility of financial markets and predicted US interest rate hikes, as well as increased scrutiny of deals by state courts and the Department of Justice, makes it hard to determine the rest of the year’s forecast.
What’s Fueling the Growth in M&A Activity?
Industry data² presents a strong argument that the uptick in M&A activity will be fueled by corporations’ quest for growth. Rather than spin their wheels trying to do it all internally, it’s easier to buy another company’s existing products, profits, and market share.
The availability of debt financing at historically low financing rates is also a boon for M&A activity, especially in the healthcare³ and tech sectors.
Markets to Watch: Healthcare and Tech
M&A activity is expected to grow in the pharmaceutical industry⁴ as companies struggle to fill their product stockpiles. The growth is fueled in part by revenue-generating drugs going off patent, and life science companies realizing the struggle in transitioning from a drug creator to a commercial drug company. Other organizations are buying up drugs they feel would sell more with better market positioning.
In the tech sector, it’s predicted⁴ large organizations will use their significant liquid assets to continue buying up the products and intellectual property of their smaller competitors.
The China Factor
Recent financial insecurities in China are expected to impact global M&A activity, as well as the world’s economies and currency markets. This was evidenced when the Chinese stock market crashed in summer 2015 and sent equity markets everywhere into a nose-dive.
The first quarter of 2016 is already off to a concerning start. A seven percent plummet on the first trading day of the New Year, followed by another plunge three days later, has contributed to the worst kickoff⁵ for global equity markets in decades.
The decreasing value of China’s currency and export prices, as well as a string of recent blunders by the country’s politicians, has the potential to cause even more global repercussions.
Elsewhere throughout Asia, M&A activity is on the rise in Japan and South East Asia, but in Australia it’s declined 18 percent in the last quarter of 2015.
The Americas: Taking the Long View
Throughout North America and Latin America, there was an uptick in M&A⁶ activity in 2015. In both regions the growth was preceded by a decline in activity.
In Latin America, the financial forecast for Brazil, the region’s largest economy, is negative. The growth in M&A activity could indicate investors are making deals that support their long-term goals and looking past the current financial situation. However, the Southern Cone has some optimistic signs⁷ with the recent presidential election in Argentina leading the country to re-open to foreign investment.
Up north, it’s expected M&A activity will see a moderate increase in the first half of 2016 thanks to the Fed’s hesitance to drastically raise interest rates. Steady economic growth, a strong US dollar and lower oil prices may also help fuel deal activity.
Acceleration in EMEA
Europe, the Middle East and Africa saw the highest growth increase in M&A activity in the last quarter of 2015. Most of the region’s largest economies finished the year on a strong note.
The only exceptions were in the typically volatile emerging economies of Eastern Europe and Sub-Saharan Africa.
Activism and Regulation
Closer to home, activism and regulation may play a part in 2016 M&A activity.
Breakups, divestments, and sales are among the top requests from activists. This is expected to contribute to increased M&A activity in the year to come. Even the threat of this kind of campaigning may push boards to consider buying and selling more often than they have in the past.
On the regulation side, the Department of Justice’s blocking of several major contracts in 2015 indicates future deals – big and small - will be closely examined. In Delaware, courts are scrutinizing whether financial advisors pose a conflict during the sale process, indicating organizations should develop processes to identify potential issues throughout any planned deals.
Will there be an M&A Bottom?
It’s too soon to predict precisely how the rest of the year will unfold. However, there is a significant chance that the Fed’s recent decision to raise interest rates for the first time in nearly a decade may slow future growth.
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¹http://dmi.thomsonreuters.com/Content/Files/2Q2015_Global_MandA_Financial_Advisory_Review.pdf
²https://www.intralinks.com/sites/default/files/file_attach/intralinks-deal-flow-predictor-q1-2015_0.pdf
³https://ct.wolterskluwer.com/resource-center/articles/new-trends-reshaping-healthcare-mergers-and-acquisitions
⁴https://www.cooley.com/72698#article1
⁵https://www.intralinks.com/sites/default/files/file_attach/intralinks-deal-flow-predictor-q1-2015_0.pdf
⁶https://www.intralinks.com/sites/default/files/file_attach/intralinks-deal-flow-predictor-q1-2015_0.pdf
⁷http://cornerstonecapinc.com/2016/01/managing-chaos-legitimacy-and-institutional-revision-in-argentina/