Bankers call them “elephant deals” – blockbusting takeover bids that slam together vast global businesses.
And when the corporate history books are written, 2015 will be remembered as the year of the elephant.
A cluster of massive deals have made 2015 a record-breaking year for mergers and acquisitions globally, with the total value of deals breaking the record set in 2007, before the financial crash. According to data from Dealogic, there have been nine deals worth more than $50bn (£33bn) in 2015, five more than in 2014.
The big bids were led by US pharma group Pfizer’s recently announced $160bn deal with botox-maker Allergan. The next two top deals were UK-based – brewer Anheuser-Busch InBev’s $117bn bid for rival SABMiller, which was launched in London, and Shell’s $81bn acquisition of BG.
On Friday came another: US chemicals groups Dow and DuPont, both founded in the 19th century, agreed a merger to create a $130bn business.
David Lomer, joint head of mergers and acquisitions at JP Morgan, says: “The record year has been driven by the US and Asia. It’s been a smart time to buy companies.”
Europe has been quieter, with company bosses and shareholders wary of making bold moves in volatile markets within an economic region that has not resolved its problems. “Although Europe is in a far better place than it was a couple of years ago, corporates will think twice about doubling up in this geography,” says Luigi Rizzo, head of M&A for Europe, the Middle East and Africa at Bank of America Merrill Lynch. But he thinks big deals will happen on the continent soon: “I’m quite bullish about Europe … I think [it] is maybe one or two years behind the US M&A cycle.”
In the US, there have been giant bids in healthcare, hospitality, cable, engineering and food. Famed billionaire investor Warren Buffett has also been part of the trend, with a $32bn bid for industrial components group Precision Castparts, his biggest acquisition to date.
“These are not short-term opportunistic deals. They represent real industrial change and are highly strategic in nature,” says Lomer.
The City’s financial advisers and lawyers – who make millions from big deals – have been busy but not as run off their feet as their peers in the US. “Sometimes it has felt like there’s a party going on next door to which you’re not invited,” says Piers Prichard Jones, a partner at Freshfields Bruckhaus Deringer, a law firm that has nonetheless worked on many of the big UK deals, including the Anheuser and Shell deals.
“There have been some very big UK deals but not a flow of mid-market ones,” says Prichard Jones.
According to Dealogic, there have been £619bn worth of UK deals so far this year – way ahead of last year’s £388bn – but the number of deals has come down. This year’s figure is likely to fall well short of the £848bn recorded before the financial crash in 2007.
While many deals look genuinely strategic from an industrial point of view – like Anheuser-Busch InBev’s takeover of SAB Miller, which gives the merged group more than 30% of the world’s beer market – others have been constructed with tax benefits in mind.
One of these is Pfizer’s bid for Allergan, which, if it goes through, should reduce Pfizer’s corporation tax rate from the 35% it pays in the US to something closer to the 12.5% rate that applies to Allergan in Ireland.
Prichard Jones thinks there’s been an increasing riskiness about some of the recent deals: “Because a lot of deals are strategic, there have been a growing number of competition issues.” That has resulted in target companies demanding big money if a deal gets derailed. Earlier this year, for example, Rexam’s board demanded a £320m break fee – 7% of the deal value – when it recommended a £4.4bn bid from US rival Ball Corporation. The deal has still not completed.
So far there is no sign yet of the elephant charge coming to an end. Prichard Jones says: “M&A is cyclical so the cycle will inevitably turn at some point. But it is obviously difficult to call when that will be. Interest rate rises are inevitable and that may dampen activity in the near term. But if the rises are gradual, the impact may not be very significant.
“The greatest impact is likely to be caused by a loss of confidence, for example as a result of macroeconomic or geopolitical events or announced deals not completing.”
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