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August 3, 2016

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US M&;A market cools off with fewer megadeals

AFTER two blockbuster years, the first half of 2016 has brought M&A activity in the United States back to normal levels of activity, with fewer megadeals and generally lower deal values. Although deal flow is lower than last year, the first half of 2016 is in line with historically strong M&A trends. The 2,291 deals recorded in the first six months are far ahead of the 1,825 deals recorded in the first half of 2013.

Economic, regulatory and political uncertainty has all influenced this return to normality. Economically, US GDP growth is slightly below last year’s 2.4 percent increase, and there is the specter of rising interest rates on the horizon. Europe’s markets are sluggish. Questions continue as to the pace of China’s economic growth and oil prices remain low. But, overall, the appetite is still in place and the broader macroeconomic backdrop is amenable for deals.

Regulatory issues have arisen in connection with certain transactions. The Committee on Foreign Investment in the United States, which reviews transactions that could result in control of a US business by a foreign person, blocked the sale of a Dutch company’s US-based lighting division on national security grounds. And several deals are facing tough challenges under the US government on antitrust grounds.

Politically, it’s been a particularly challenging year, from the ongoing drama of the US presidential elections to Brexit. The uncertainty resulting from the latter in particular will no doubt resonate for years to come. While it is difficult to speculate on actual outcomes until negotiations begin, the stakes are high for US M&A, given the UK’s position as the top target for US buyers, with 128 deals worth US$20.8 billion.

Yet, despite all of this uncertainty, there are reasons for optimism. The technology, media and telecommunications (TMT) sector continues to dominate deal flow, accounting for 22 percent of all transactions, as executives and dealmakers acknowledge the transformative opportunities presented by tech.

Non-tech buyers are also keeping an eye on the nascent fintech industry. And the pharma, medical and biotech sector saw 250 deals, accounting for 11 percent of deals — including the first half’s two biggest single takeovers: Ireland-registered Shire bought Baxalta at the start of the year, and Abbot Laboratories acquired St. Jude Medical in April.

Sectors like TMT will no doubt continue to offer new opportunities, even if the wider geopolitical and macroeconomic picture causes some to look very closely before they leap. More broadly, the conditions that have driven M&A around the world for the past two years have not fundamentally changed and so we expect a very busy second half.

US M&A market is taking time to digest recent deals, and uncertainty regarding broader macroeconomic and political issues is leading some to take a more cautious approach.

Some broad factors are likely to influence activity for the remainder of 2016:

The political climate may lead many to proceed with caution. The UK’s Brexit decision ensures that economic uncertainty will continue in Europe, and the US presidential election in November may also cool the ardor for transactions. Stricter rules limiting tax inversions — a structure used for several pharma megadeals in recent years — may also give pause for thought.

There are signs of more mid-size deals in the tech sector, with suggestions that the decrease in overall deal values is not reflective of the continued strength of this space. The number of actual deals has remained stable, and the economics for tech M&A remain viable. Moreover, the rapid pace of technological change can make it more practical for established tech companies to buy innovative startups rather than investing in their own R&D channels—a process that would be facilitated by many buyers’ cash-rich balance sheets.

There is certainly available capital should companies wish to pursue an M&A route. Firms are still buying stock, which indicates that they have the resources for transactions. But many of the more exciting opportunities, such as fintech, are in the early stages, which makes it difficult to anticipate any major moves.

We think the US M&A market is now taking a short breather and will come back strongly in September, absent some big exogenous shock. Most of the conditions for a busy end of year remain in place: Lots of cash, low interest rates, strong stock markets (notwithstanding the elections and Brexit) and plenty of strategic imperatives in many industries that can best be satisfied through acquisitions.

The febrile political atmosphere in US politics—particularly surrounding Donald Trump’s rise as the Republican nominee—has shifted political risk higher up the corporate agenda when it comes to gauging potential M&A decisions. Even in the early months of the presidential primaries, the political climate was already having an impact.

(Source: White & Case LLP)


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