Number of European mergers and acquisitions drops, but value rises

30 October 2017 5 min. read

The global merger and acquisition market has seen a fall in the number of deals completed, while the total value of deals has risen. While the slight fall in M&A density is balanced by increasing prices, geo-political forces and increasing national protectionism could see activity impacted in a more concerning way in the future.

Earlier in 2017, global M&A activity was predicted by business leaders to remain robust, despite deal intensity slowing from 2015's figures last year. Activity remained well above that of the years following the financial crisis – and the participants of the survey by Big Four firm EY were generally upbeat about the prospects of the global economy. 64% believed the economy was improving, 32% said that it is stable, while just 4% said that they saw it as declining. In April and October 2016, just 21% and 36% said conditions were improving, while 55% and 49% respectively said conditions were stable. The majority of companies were expecting to continue leveraging acquisitions in 2017. The number was down slightly from October 2016, when it stood at 57%, although up from April last year when geopolitical uncertainties saw expectations fall to 50%. Overall then, the results prompted experts to expect above average acquisition activitythroughout 2017.

Now, a rival analysis by fellow Big Four member KPMG has revealed the merger and acquisition activity of the first half of 2017. The latest “Deal Activity Update” report shows that the volume of sales on the global market in the first half of the year actually dropped compared to the first six months of 2016. During the first half of 2017, 8,553 transactions were announced – a decrease of 6.8% over the first six months of 2016 when 9,180 deals were closed. Compared with the second half of 2016, the decline is even greater –9,328 deals were closed in the last two quarters. Worldwide, the total value of transactions increased from €1,235 billion in the first half of 2016 to €1,405 billion in the first six months of this year. While this was the third highest cumulative deal value in the last six months, it was a far cry from the record, which was achieved in the second half of 2015 as closed deals hit €1,961 billion.

Global deal volume

While overall value increased for deals in the EU, comparatively, the number of deals also fell by 9.7% in the first half of 2017, declining to 3,448 transactions. According to Danny Bosker, partner of KPMG Corporate Finance, the mixed nature of these trends is the result of changes in market dynamics. On the one hand, new competitors emerging means that companies work harder to improve their results, leading to higher sales values. On the other hand, investors and companies have to spend a lot of capital, because in previous years few attractive takeover opportunities appeared. In other words,  companies must now target quality over quantity due to inflated deal prices.

Another trend which emerged from the study is an increase in cross-border deals. The share of acquisitions of companies in the EU by companies from outside the EU has increased to almost 25% this year. In 2009, it was only 17%. A majority of the acquiring parties come from the United States and Canada. They focus mainly on EU companies active in the manufacturing, technological and business sectors.

EU deal volume

In view of this rise of over-seas ownership, Bosker emphasised that protectionism would likely continue to gain influence in European countries, partly in light of spending sprees in the UK, following the steady decline of the British Pound. Predatory companies, particularly from Asian economies like China, are therefore currently seizing on the improved exchange rate on their end to buy up everything from real estate to football clubs. Bosker elaborated, "Across the European Union, a discussion is currently taking place regarding foreign acquisitions. The measures taken by governments to prevent such ‘unwanted’ acquisitions will therefore become more and more visible. As long as these protection structures are not yet in place, the interest of US and China companies will increase significantly for companies within the EU.”

Climate remains attractive

Despite the decline in the number of transactions, in Europe and worldwide, the study concludes that the merger and acquisition climate remains highly attractive for investors. The prognosis is the latest to anticipate a positive outlook for mergers and acquisitions worldwide. For example, recent studies by Grant Thornton suggested that the number of mergers and acquisitions in the digital, advertising & marketing and food sectors continue to increase, while an AT Kearney analysis showed that the chemical industry is also descending on a record year. Most analysts therefore agree that the slowing in M&A activity in the short-term is no immediate cause for concern.

What could, however, trouble this sunny forecast, is the development of broader political and economic issues. According to Bosker, "A number of developments in the world are gaining increasing influence on the global merger and acquisition market. The increased attention of countries to a more protectionist policy, such as the Brexit, the course of the new US President and the current independence question for Catalonia, will inevitably affect the global market.”