M&A activity picks up in October amid fears of looming rate hike
After a sluggish start to the year, the U.S. mergers and acquisitions market shifted into high gear as deal flow began to pick up in the final weeks of October. According to CNBC, the total value of announced M&A deals in the United States last month reached $337 billion, topping the previous record of $282.2 billion set in January 2000. Despite the uncertainty surrounding the U.S. presidential election, lower interest rate environments and weaker sales growth warranted a handful of blockbuster deals.
In the first half of 2016, M&A activity fell 11 percent year-over-year, according to Mergermarket data. Analysts attributed the low deal volume to factors such as the Brexit vote and the slow employment growth in recent years.
The technology, media and telecommunications sector led all industries in M&A transactions during the first half of the year, accounting for 22 percent of deal flow.
John Reiss and Gregory Pryor are partners at White & Case LLP. In the company’s U.S. M&A H1 2016 report, the two wrote that despite the recent cooldown in deal activity, there are reasons to be optimistic.
“M&A in the fast-growing tech sector, [Reiss] argues, has proven resilient despite the risk factors breeding uncertainty in deal markets. Fluctuations in equity markets and the increasing difficulty in obtaining debt do not seem to have affected global tech sector M&A to any great extent in 2016,” the report states.
According to Thomson Reuters, global M&A activity took a downward turn in the third quarter as the value of announced transactions worldwide declined by 27 percent compared to the same period last year. Regulatory approval issues coupled with the outlook for higher interest rates discouraged many companies from pursuing new deals. The rise of the bearish sentiment in the M&A market was also driven by strategic concerns from companies constrained by tighter capital budgets.
Mergermarket’s third quarter report showed that the industrials and chemicals sector was the most sought-after industry globally, with deals totaling $416.8 billion in 2016. The 41.1 percent surge in value throughout the first three quarters was largely due to two massive deals—Bayer’s $65.3 billion acquisition of Monsanto in September and China National Chemical Corporation’s $45.9 billion bid for Syngenta in February. Both mergers are currently awaiting regulatory approval, which could be delayed to 2017.
If the Bayer-Monsanto merger passes, the newly formed company will become the largest global supplier of seeds and farm chemicals, which is not in the interest of antitrust officials. Syngenta also reported regulatory issues concerning its proposed merger with ChemChina and announced that the deal between the companies will most likely close next year.
Goldman Sachs was listed as the leading global financial advisor year-to-date with 185 worldwide deals worth $602 billion. Bank of America Merrill Lynch, Credit Suisse, JPMorgan and Morgan Stanley also made the list.
AT&T’s proposed acquisition of Time Warner Cable became the story of the month when the telecom giant confirmed its $85.4 billion agreement to buy the media company. Earlier this year, rival Verizon Communications announced a $4.8 billion offer to acquire Yahoo’s core assets. As the two biggest telecom companies in the nation, AT&T and Verizon have struggled to stay competitive in a saturated market.
With the Time Warner agreement in place, AT&T is laying a big bet on mobile TV services to be the next big hit. Despite many doubts that the merger will gain regulatory approval, AT&T CEO Randall Stephenson is not a man unfamiliar with working on large deals. Last year, Stephenson spearheaded the company’s $48.5 billion acquisition of DirecTV to form the largest pay-television provider in the world.
In addition, Qualcomm proposed a $47 billion deal to purchase the world’s largest automobile chipmaker, NXP Semiconductors. The move by Qualcomm suggests that the tech-focused company is ready to expand its mobile operations to the automotive industry. Although Qualcomm already supplies the chips that bring cellular service to cars, the company hopes that NXP’s exposure in the automotive industry will allow the newly formed company to dominate the field more quickly.
Another big deal in October was the General Electric-Baker Hughes merger. Following another dismal earnings quarter, GE announced plans to combine its oil and gas business with the latter company. The newly formed business will allow GE to focus on its industrial business. With the price of oil dipping below $30 a barrel earlier this year, many companies are still struggling to recover their losses. Although GE will lose up to $7.4 billion in dividend payments if it decides to spin off its oil and gas unit, the company could see better returns without a division that has put overall profits in trouble for years.
While news of M&A transactions picking up is a good sign for the economy, the number of deals being made is surprising, considering a quickly approaching major election. Typically, M&A activity is quiet during the election cycle because of the political uncertainty. However, with the stricter regulatory rules that the two presidential nominees included in their campaign platforms, companies could face more difficulty gaining approval under the new president than they would under the current conditions.