Cash & Liquidity ManagementInvestment & FundingEconomyMergers and acquisitions: why appetite will return

Mergers and acquisitions: why appetite will return

A report this month by the enterprise platform Intralinks forecast that the sharp slowdown in global merger and acquisition activity over the first half of 2016 would set the tone for the rest of the year. In this interview with GTNews, the firm’s M&A expert, Philip Whitchelo, explains why the lull will prove only temporary.

Global appetite for merger and acquisition deals (M&A) has been voracious in the past two years. Worldwide M&A activity grew by more than 10% in 2014 and by 8% in 2015. By contrast, this year hasn’t seen anything like the same hunger for deals. Earlier this month virtual data room and technology provider Intralinks forecast that the recent Brexit vote in the UK and resulting uncertainties would keep activity subdued for the near term and it forecasts that M&A will grow by less than 1% this year.

GTNews spoke with M&A expert and Intralinks’ vice president of strategy and product marketing, Philip Whitchelo, to discover the other reasons for the drop and the firm’s forecasts for the future.

Regional variations

Although Intralinks reports that there will clearly be a slowdown in global M&A activity this year, Whitchelo says that the projected growth figure of below 1% doesn’t distinguish between regions or countries and masks a number of significant differences.

While Europe ex-UK, the Middle East and Africa are still growing, for instance, Asia Pacific is likely to be flat and North America will be down by double digits. While Latin America overall is on a rebound it doesn’t extend to Brazil or Mexico.

“Asia is curious,” Whitchelo suggests, since the picture is so different region-wide. While M&A is declining in North Asia and Southeast Asia, it is up significantly in Japan, Australia and India. “We think the reason Northeast and Southeast Asia are declining is due to the China region, as they’re dependent on trading with China,” he explains.

While Australia had seen slowing M&A activity – due to a drop in the metals and mining sector as demand from China slowed – on the other hand “this quarter is the first time we’ve seen a pickup since the first quarter of 2015, due to growing M&A in industrials and retail.”

Despite a number of problems growth is also strong in India because the active reform effort by Narendra Modi’s government that is now underway makes the country attractive, while Japan is going through a huge fiscal stimulus, which has resulted in growth.

In mainland Europe, despite the uncertainties created by Brexit the interest rate easing cycle and monetary stimulus are leading to investment continuing to follow into the region, resulting in M&A growth.

According to Whitchelo, three factors have led to reduced deal activity in North America. First is that the US economy is slowing, second is that the Federal Reserve is “bent on an interest rate increase path this year,” and the third is this November’s presidential election, which has created a huge uncertainty amid rhetoric from both major party candidates that is anti-business, anti-free trade, and anti-globalisation.

A temporary slowdown

While the near-term prospects aren’t promising the slowdown in M&A deals is temporary, Whitchelo believes. “If you’re a company, it is hard to grow when economic growth is low and inflation is low,” he suggests. “You can’t raise revenue. Organic growth is hard. Companies are desperately searching for growth. You look to M&A to grow.”

That forecast is supported by the economic cycle. “Economic growth is below trend, no inflation, interest rates at zero – when you have those three forces together, that’s incredibly powerful, the driver of the huge amount of M&A activity over the past couple of years.” However, he also notes that any change in one of those main drivers – the inflation rate picking up, interest rates moving higher or stronger growth – could yet put a brake on M&A activity.

Since interest rates are currently so low, M&A is largely debt-financed. Even companies with huge amount of cash, such as Apple and Microsoft, are raising debt financing to complete acquisitions, says Whitchelo. “If someone gives you free money, that’s what you do.”

Success factors for deals

Beyond just transacting M&A deals, what’s really important is completing them successfully. Intralinks conducted research last year, in which it analysed 25,000 firms and 265,000 M&A deals over the course of 20 years, to identify the factors that contribute towards success.

One key success factor if you’re a buyer, according to Whitchelo, is acquiring certain competencies in doing deals. “The more frequently you buy, the better you become at it and then you get higher total shareholder returns.”

“We also found that companies that only did a limited frequency of divestments had excess shareholder returns. Once every two or three years, that was leading to out-performance. The good companies identify underperforming businesses and select them for disposal to companies that can do better with them.”

Companies also outperform if they carry out a significant amount of cross-border M&A and also when they focus on smaller acquisitions that fill market product or technology gaps, rather than becoming occupied only with very large transformational acquisitions.

Finally, companies succeed by paying close attention to market cycles. They start to decrease acquisitions towards the end or middle of bull markets, when conditions become overheated. When markets reach the bottom, they increase the number of M&A deals just as other buyers evaporate. Whichelo cites as examples the end of the tech boom in 2000 and the onset of the global financial crisis during 2007 and 2008.

With M&A activity forecast to start rising again before long, that advice could prove especially beneficial for more than a few companies.

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