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17 Jan, 2019

M&A activity dives

M&A activity dives

Dealmaking has decelerated rapidly from the record pace seen at the start of 2018, with the final three months of this year poised to be the quietest period for mergers and acquisitions since the third quarter of 2017.

Companies have agreed deals worth $761bn since the start of October, down more than 25 per cent from the first and second quarters, when a blistering $1.2tn worth of transactions were struck in each period, according to the data provider Refinitiv. The slowdown follows a turbulent period in global stock markets.

Several advisers said the recent market turbulence could make it difficult for buyers and sellers to come to an agreement on price when attempting to strike a deal. Bidders have already cut their offers in several live auctions, using the recent share price drops as a justification. Boards have so far been reluctant to accept the lower offers, given the all-time highs hit by global stocks in September.

Collapse of China deals

An intensifying trade war between the US and China has only added to the pressure building against corporate Chinese acquisitions between the countries in 2018. While Chinese companies agreed to $182bn worth of cross-border deals this year, up 17 per cent from 2017, takeovers of US groups slid 15 per cent.

More hawkish national security policy in the west has helped to turn away Chinese buyers from developed markets. Chinese M&A into the US fell to $9.3bn, with the number of deals off by a quarter. Underlying the trade dispute between the world’s two largest economies is what the US perceives as a strengthened effort by China to become the world leader in high technology and valuable high-end manufacturing, often through purchases of foreign intellectual property.

The pushback against Chinese M&A is not limited to the US. It’s more of a global phenomenon where globalization and easy access to markets is becoming more difficult, Germany and Canada have developed stronger national security checks. Canada surprised China watchers earlier this year by blocking state builder China Communications Construction’s $1.18bn takeover of construction group Aecon. China has also sought to exercise its powers to block global deals, most notably Qualcomm‘s $44bn acquisition of NXP Semiconductors.

2018 had a wave of mega deals

Global mergers and acquisition activity was driven by mega deals in 2018, as corporate boardrooms around the world made big bets in an effort to boost revenue growth and better compete against a new tide of digital disrupters across all industries.

Transactions worth more than $5bn rose 70 per cent to about $1.5tn, representing about 40 per cent of overall volumes in 2018. Deals with a price tag higher than $10bn rose from 28 transactions in 2017 to more than 40 this year, including the $77bn acquisition of the Irish drugmaker Shire by its Japanese rival Takeda, and Comcast’s $48bn takeover of the UK broadcaster Sky.

The total number of deals in 2018 dropped almost 10 per cent to just under 44,000 transactions compared with a year ago, according to Refinitiv. The biggest drop was in smaller deals under a $1bn, which are often considered to be the bread and butter for investment banks advising on M&A.

Private equity retains ‘dry powder'

Leveraged buyout activity soared in 2018 to its highest levels since the financial crisis, with $10bn-plus private equity takeovers becoming more common.

In total, leveraged buyouts worth almost $384bn were agreed in 2018, up 28 per cent from a year previously. Leveraged buyouts have crossed the $400bn mark only twice before in history: in 2006 and 2007 before the financial crisis.

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