M&A BOOM SET TO LIFT EUROPE’S GLOOM THE SIGNS ARE POSITIVE FOR A STRONG YEAR OF DEAL-MAKING AHEAD, BUT EUROPE’S STRUGGLING ECONOMY REMAINS A CONCERN
For Europe’s M&A bankers, 2014 will go down as the boom that got away. A procession of withdrawn and abortive mega-deals robbed many firms of a bumper pay-day.
For investment banks, 2014 was game, set and match to the equity capital markets. But while it will not go down as a vintage year for M&A, the recovery in deal activity is tangible. Announced deal volumes in Western Europe are close to their highest levels since 2008 and as the recovery continued to build throughout the year, bankers are confident of a bumper 2015.
The year was defined by a predominance of failed transactions, resulting in millions in lost fees for the investment banks that advised them. Withdrawn deals hit their highest volume since the financial crisis as notable deals involving European companies were abandoned within a matter of days. On October 17, Norway’s Yara International and CF Industries of the US called off their US$27bn merger talks, and less than a week later US pharmaceuticals giant AbbVie shelved its US$55bn takeover of UK peer Shire. That followed the decision by French cable company Iliad to pull out its plan to acquire T-Mobile USA.
But focusing on these failures as evidence of the health of the M&A market does not paint the true picture. By far the biggest concern is that for all the focus on the return of cross-border mega-deals, the underlying volumes
have been anaemic. “The M&A recovery is not firing on all cylinders,” said Severin Brizay, head of European M&A at UBS. In particular, the number of deals with a value of between US$500m and US$2bn has remained static. This deal range is the life-blood of any broad-based recovery in the M&A market.
Surging equity markets have stymied M&A deal volumes because they have pushed the valuations
of targets sky-high, deterring potential buyers and encouraging sellers to seek exits via the IPO markets rather than through a sale process. A spike in volatility sparked a re-rating of the equity markets in October which, provided it doesn’t trigger a more permanent slump, should embolden buyers to pursue deals at more reasonable valuations. “Activity in the US$500m to US$2bn category has been sluggish as vendors have looked to sell out via the IPO market. As equity market valuations normalise, M&A activity in this size range should increase,” said Liam Beere, head of European M&A at Moelis & Co in London.
But unlike previous years since the 2008 financial crisis, this is no false dawn. “We’re in the first year of the recovery in Europe’s M&A market – I expect it will be a gradual recovery reflecting the region’s slow economic recovery. There has been limited M&A in the last few years but companies are now looking for growth and have cash resources available”, Beere added.
CEO confidence, the life-blood of any M&A cycle, has returned. But at the moment, it’s limited to Europe’s biggest companies, which have come through the crisis with strong balance sheets and are braving a climate of geo-political unrest to get deals done against a backdrop of highly favourable financing conditions.
M&A FOR GROWTH
With Europe’s economies languishing in a vortex of low growth and the spectre of recession lurking on the horizon, companies are using M&A as a tool to boost top-line growth by looking overseas for targets. In Spain, the country’s handful of global champions has re-gained its swagger. In October utility Gas Natural completed its biggest deal in seven years with its US$7.4bn acquisition of Chilean electricity distributor Compania General
de Electricidad (CGE) while in September Telefonica paid US$9bn for Brazil’s Global Village Telecom, the broadband business of French conglomerate Vivendi.
The desire for growth outside Europe has fuelled a 46% rise in deal-making in the year to October 21 with 10,151 deals with a value of a US$977bn involving Western European companies being announced, according to Thomson Reuters data. The US was central to the recovery in M&A as the strength of its economy attracted bidders from European companies. “We have seen a boom in takeovers by strong well capitalised German companies looking to buy growth and the US has been their destination of choice,” said UBS’s Brizay.
Notable US transactions by German companies included Merck KGaA’s bid to acquire Sigma-Aldrich, the manufacturer and wholesaler of biochemical and organic chemicals, for US$16.449bn; Bayer’s US$14.2bn purchase of Merck & Co’s consumer care business; ZF Friedrichshafen’s US$12.9bn purchase of TRW Automotive Holdings; Siemens’ US$7.7bn acquisition of Dresser-Rand; and SAP’s US$7.3bn purchase of Concur Technologies.
Other big Transatlantic deals by European buyers included Italian slot-machine maker GTECH’s US$6bn purchase of International Game Technology, while Swiss drugs company Roche bid US$7.9bn for InterMune. In total, European companies announced 657 acquisitions of US targets worth a combined US$203bn, compared with 593 worth US$195bn a year ago.