Pre-Planned Divestitures Will Drive M&A Decisions in ‘16
Another year over, another year of record deal making in the books.
Global mergers-and-acquisitions volume increased in 2015 to a whopping $4.87 trillion – the biggest year ever for M&A. That figure surpasses what is now the second-highest volume on record since before the 2008 financial crisis, which was $4.61 trillion in 2007, according to data from Dealogic.
Rich Jeanneret, EY Americas Vice Chair of Transaction Advisory Services, said it’s not so much the volume of deals on the Street, but the size that matters most. He said by November, almost 50 deals were valued at more than $10 billion, which compared to only about 20 deals of that size by the same period last year.
Jeanneret said those figures prove corporate America was a lot more comfortable taking risk this year.
"The best way to proactively manage a deal is to contemplate antitrust concerns in advance, and plan strategic asset sales prior to the announcement."
“There were much bigger bets, more companies risking more capital. When that happens, the level of focus on the CEO when things go wrong is heavier than ever and that makes the consequences that much greater,” he explained. “Those factors are what constrained [M&A] a few years ago after the crisis. So the big story here is risk taking, which was rewarded by the marketplace.”
To that point, he said share prices of companies initiating transactions have grown over the last two years, up on average about 2%. In the past, share prices for buyers would have traded down as shareholders became concerned about the impact a deal would have to corporate earnings.
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But now that’s all been reversed.
“With global growth being constrained by slowing GDP, a great way to create top-line growth is through M&A transactions with focus on synergy and scale. We expect that to continue through 2016 since we’re not seeing any major signs of slowdown,” Jeanneret said.
Regulatory Red Light, Green Light
Perhaps what’s shocked the investing community the most over the last year is the size of the companies engaging in merger talks. Some of America’s biggest and most storied companies, from Dow Chemical (NYSE:DOW) to Pfizer (NYSE:PFE) looked to consolidate this year, and some are still in limbo as they await regulatory approval in order to close the deal.
Jeanneret said it might be the most interesting part of the deal making landscape as companies have started to think ahead, outline scenarios and pieces of the potential deal regulators would object to, and work it out all before even going public with an acquisition target.
“What I’ve seen occur more is big companies knowing that concentration is a risk in the transaction, and making divestiture plans in the deal making, truly contemplating what assets they have to divest to make sure regulators are satisfied,” he explained.
He pointed to October’s announced deal between AB InBev and SABMiller. The companies decided to sell SABMiller’s 58% stake in Molson Coors Brewing Company to Miller Coors, which owns the remaining stake, along with a sale of the Miller portfolio to a buyer outside the U.S. for a price tag of $12 billion. With the announcement, AB InBev’s CEO said the sale was proof the company would be “very decisive and very prompt in dealing with any regulatory issues that arise.”
Jeanneret added it’s a similar situation with the reported tie up between Dow Chemical and DuPont (NYSE:DD). The companies are said to seek a merger deal, but rather than simply combining two companies into one, they would most likely join, and then separate into three separate entities based on sectors.
“I think while the regulatory environment is a little harder, on the margin most deals are getting through, and only a few have not. The best way to proactively manage a deal is to contemplate antitrust concerns in advance, and plan strategic asset sales prior to the announcement,” he said.
Higher Rates, Elections No Big Deal
Two topics are likely to dominate the narrative on Wall Street next year: Rising interest rates thanks to the Federal Reserve, and the 2016 presidential election.
While rates rose by a quarter of a percentage point in December, the impact to deal making is not seen as significant.
“It will all depend on how competitive strategic buyers and corporate America will want to be: They’re using stock more now than ever before given the price of equity markets. We saw more deals using corporate currencies. That might not alleviate the valuation pressure, but there’s a massive amount of unemployed capital,” Jeanneret explained.
In addition to interest rates, tax inversions have been a big focus for Wall Street and political candidates alike. Inversions, or corporate deal making as a way to escape the high tax burden in the U.S. by moving a company’s headquarters to another nation with a lower tax rate, has been a point of contention for Democratic candidates in particular.
Pfizer’s announced deal to merge with Allergan only allowed the conversation to heat up about how to squash inversions. In fact, former Secretary of State and Democratic presidential candidate Hillary Clinton, unveiled a plan that involves an “exit tax,” to penalize companies seeking to relocate their corporate headquarters.
But Jeanneret said the inversions story is overplayed since of the around 10,000 announced deals, only about 100 are aimed at escaping the tax burden.
“The fact is that the corporate tax scheme is very uncompetitive to the rest of the world. Look at where those inversions are happening: Life sciences. We’re competing with companies in Ireland and the UK who have more competitive tax schemes. That’s a problem. We should be concerned with our tax policies and how to make them more competitive,” he said.
In Pfizer’s case, moving its HQ out of the U.S. to Ireland would allow it to reduce its tax requirement from 25.5% (which it paid in 2014)to about 17%. It would also go down as the biggest ever transaction in the health-care space.
Jeanneret said regardless of what happens with tax policies and efforts to snuff out inversion practices, a high level of deal making in the life sciences industry is likely to “keep rolling” next year. He also expects to see more deals flowing from the auto industry with the advent of driverless cars, and technology thanks to the booming business of the Internet of Things.