It seems appropriate that at the end of 2014, a year that saw the return of the mega-merger US healthcare company Stryker is planning a bid for Smith & Nephew and BT have agreed terms for a £12.5bn acquisition of the UK’s largest mobile phone operator EE from joint foreign owners Deutsche Telecom and Orange.
It is these kinds of huge deals that have pushed global deal volumes to pre-crisis highs in 2014. Low interest rates have been a gift to companies looking to merge because it lowers the cost of financing deals whilst at the same time creating a favourable environment for stock markets.
Mega deals could be a worry
M&A activity in the UK for 2014 was a story of two halves. On the one side the value of the mergers and acquisitions was the highest since before the recession but countering that, the number of deals remained fairly flat. A rule of thumb for investment banking activity is that the UK lags the US by twelve months so the rise in the number of US deals in 2014 could translate to an increase in UK M&A in 2015.
This apparent tendency for fewer, bigger deals can be interpreted several ways. The availability of financing and investor enthusiasm required for big deals to happen speaks well for general market conditions. A worry is that smaller companies should also be active in a dynamic growing economy. The dramatic rise in corporate stock buybacks alongside the increase in M&A supports the idea that corporations are engaging in financial engineering as an alternative to organic growth.
Telecom deals to move across the pond
The mega deals of 2014 were heavily concentrated amongst telecoms, healthcare and the tech sector. The two biggest deals took place in the US; the acquisition of Time Warner Cable by Comcast and AT&T’s takeover of DirecTV. The telecoms sector in the US is already heavily-concentrated so there maybe not too much more room for manoeuvre in 2015, barring perhaps another bidder for T-Mobile.
In the light of the latest move from BT to acquire EE, ownership amongst telecom companies could see some movement in the UK next year as the likes of Sky and Vodafone look to offer “quad-play” services that include broadband, pay TV, home phone and mobile. Vodafone is one of a number of possible buyers if Tesco offloads its Blinkbox video streaming service.
The rise of the tax inversion deal in 2014 where US companies look to minimise their tax burden by switching headquarters abroad looks to have ended before it even got started. Pfizer’s attempted takeover of AstraZeneca and Abbvie’s cancelled takeover of Shire both ran out of steam because of investor and government opposition to tax-motivated deals.
Walgreens still went ahead with its full takeover of Alliance Boots in the UK without making it a tax inversion. Stryker’s planned bid for Smith & Nephew is apparently not for tax related purposes. Deals going ahead without an inversion premise imply there is still some room for movement in the healthcare sector to come despite US tax-law changes.
Asset-swaps, spits and spin-offs
Healthcare stocks threatened by the rise of biotechs have engaged in some large “asset swaps” as they look to focus their R&D spend in areas they are most successful. Only so much restructuring can be done at one time so this theme may slow in 2015 but should be on-going.
Splits and spin-offs are a new trend that have come to the fore with notable examples being HP splitting up, eBay hiving off PayPal and French utility provider Eon dividing into two. The move toward splitting up large companies could be a bigger trend in 2015 given the rise of activist investors looking to unlock value in otherwise highly valued markets.
‘Big Tech’ has the cash
The biggest tech companies have been on a buying spree in 2014 with one of the most notably excessive examples being Facebook’s purchase of messaging smartphone app WhatsApp for $19bn. ‘Big Tech’ including the likes of Apple, Google and Facebook have large piles of cash and lofty stock prices that they can continue to use to buy more growth in 2015. The emergence of Alibaba as a growing global player will likely exacerbate the tendency for established companies buying into every new trend in tech, gobbling up emerging competition in the process.
A rising US dollar creates American buyers
Two of the biggest trends in markets for 2014 were the rising US dollar and falling commodity prices, especially crude oil. A stronger dollar gives US companies an increased spending power to buy companies in countries with weaker currencies. US multinationals still hold large amounts of cash from foreign earnings that they will be looking to put to use rather than repatriate it and have it taxed up to 35% by the US Treasury.
The US did dominate M&A proceedings in 2014 so there is room for resurgence in EMEA deals. It would make sense for EMEA growth to emanate largely from multinationals headquartered in Europe seeking to diversify outside of the continent to find higher growth.
Oil price drop to drive sector consolidation
The massive drop in oil prices mean the energy sector has been put under significant strain with many companies facing investment projects that no longer make sense. Oil companies with the most exposure to low oil prices face the prospect of unprofitable projects funded by debt with rising yields If oil prices remain at multi-year lows; history suggests the result can only be consolidation and bankruptcy within the oil industry.
The takeover of Baker Hughes by Halliburton has promoted renewed talk of the ultimate mega-merger between oil behemoths BP and Royal Dutch Shell. The kind of regulatory scrutiny and administrative overhaul such a deal would require makes it unlikely at least anytime soon but does go to show the shift in management and investor attitudes towards M&A that it would even be considered.
Depressed oil prices fostering global lowflation mean drastic interest rate hikes are not on the horizon for 2015 so financing should still be favourable for more deals, including those of a “mega” variety.
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