M&A market slows down, but deal fundamentals remain strong

Global M&A activity reached almost record highs in 2015 on the back of low cost borrowing and an appetite for inorganic investment led growth. New analysis highlights that M&A deal value during the first half of 2016 has slowed by 27%, impeded, in part, by political, economic and regulatory pressures. Yet,the fundamentals that drove activity in 2015 remain, with investors still keen on inorganic expansion and money remaining cheap. The possibility of a bubble burst still lures, however, with current market conditions showing similarities between 2001 and 2008.

The Boston Consulting Group’s wider analysis into the M&A market, titled ‘The 2016 M&A Report: Masters of the Corporate Portfolio’, explores current market conditions as well as the fundamentals driving M&A activity into the future.

Merger & Acquisition activity

M&A deal value reached almost record levels in 2015, up 39% on the year previous to hit almost $3 trillion in total value. Such peaks were last traversed in 1999 and 2007, both prior to large scale economic corrections, the “new economy” peak, and the start of the financial crisis in 2008. The growth of M&A activity is, according to the consulting firm, partly attributable to several mega deals that have lifted the market, and the macroeconomic conditions that have prevailed. Since the crisis, economic growth has remained lacklustre, while access to inexpensive funding (thanks to QE programmes and low central bank- and corporate rates) resulted in companies seeking to expand inorganically as organic growth slowed.

Deal activity has been particularly fierce in the health care sector, which saw year-on-year deal value growth at 102%, from $214 billion to $432 billion, partly motivated by consolidations to build out product portfolios. Consumer and retail saw year-on-year growth of 53%, up from $251 billion to $385 billion, focused on smaller deals to boost capabilities in niche products and digital and e-commerce. The high technology sector saw growth of 41% in deal value, based primarily on non-tech companies seeking to expand their product portfolios through acquisitions, as well as technology companies expanding their offerings towards integrated systems. Financial services and real estate saw the highest value in deals in 2015 in absolute terms, at $514 billion.

Tomorrow's activity

While last year was almost a record setter, this year started on a more subdued note. Deal value fell by 27% year-on-year for the first half of the year, from more than $1.5 trillion to around $1.1 trillion, while deal volume dipped slightly to just off 15,000 M&A transactions. The analysis finds, however, that current deal activity, while lower than last year, remains in line with the ten year historical average deal value.

According to the consultancy firm, a number of factors are bearing on the market. Political uncertainties (including in Europe following the Brexit vote) and the upcoming US Presidential elections; higher economic volatility in the equity markets, adding uncertainty to IPOs and share deals; and changes to regulations to thwart “inversion” taxation deals.

The firm notes that geopolitical events remain a wildcard for deal activity this year, but that many of the conditions that saw the market boom last year remain in place: low GDP growth, cheap money, available dry powder, and the need for growth among companies, global investors and for returns among private equity (PE) players.

The dry powder built up by PE firms, following their exit from a large number of portfolio companies last year, has resulted in a large war chest of $479 billion. Another area which is set to continue driving M&A activity going forward, is shareholders demanding strategic M&A for corporates. Growth focus from investors last year was recorded to be shifting from organic investment led growth towards pursuing strategic M&A.

M&A bubble?

Given the high level of M&A activity over the past year, BCG's authors pose questions about whether the current market activity is sufficiently similar to historical trends that highlight a pattern of a bubble forming. The records of 1999 and 2007 were followed relatively shortly after by considerable crashes. There are similarities between current conditions then and today – global M&A value as a share of GDP is running relatively high, yet, according to the firm, “The jury is still out on whether there are similarities to previous M&A market collapses.”