Outlook of Mergers & Acquisitions Activity in 2016

 

Our analysis indicate that mergers and acquisitions activity will continue to be interesting throughout 2016.

2015 was truly a record year for mergers and acquisitions. Fueled by buoyant stock markets, cash-rich corporate balance sheets and continued access to cheap financing, M&A activity soared last year. This has fueled skepticism as to whether the historic run of corporate takeovers can last during 2016.But the huge M&A momentum may very well continue into 2016. U.S. corporate balance sheets currently hold approximately $2.4 trillion in cash that is sitting on the sidelines. With corporate profit margins showing signs of topping out – and the prospect of higher interest rates down the road – executives may be in a rush to join the M&A party while the getting is good. Corporate M&A activity surged to $3.8 trillion last year, the highest level ever.

Last year’s total easily surpassed the previous high, set in 2007. Of course, that was the year that preceded the financial crisis and one of the worst economic recessions in the U.S. since the Great Depression. Big Pharma was one of the biggest deal-making sectors last year. Investors likely recall the $160 billion takeover of Allergan (NYSE: AGN) by Pfizer (NYSE: PFE). That was the biggest deal of the year. The consumer sector also generated acquisition activity. Anheuser-Busch InBev (NYSE: BUD) swallowed up smaller beer giant SABMiller PLC (OTC: SBMRY) for $107 billion.

Analysts do not expect the M&A boom to slow down any time soon. Takeovers accelerated as 2015 drew to a close. The fourth quarter saw $1.3 trillion in mergers and acquisitions, representing the first quarter of $1 trillion in buyouts since the second quarter of 2007. And according to an October survey conducted by Bloomberg, almost 60% of corporate executives expect to engage in acquisitions over the next year, up from 40% at the same point the previous year.

What’s Next for M&A?

It makes sense that M&A activity continues to grow. Whereas investing in organic growth can utilize massive financial resources and time, simply buying a rival firm is a quick and easy way to produce revenue growth. And companies have proven to be very adept at squeezing out significant cost synergies to boost profits and make acquisitions immediately accretive to earnings. While the health care and consumer sectors were among the busiest for mergers and acquisitions last year, the energy sector missed the party. In fact, oil and gas M&A activity plunged last year, particularly in the upstream patch. Of course, this was due almost entirely to the huge collapse in commodity prices last year. As the prices of oil, natural gas and a host of other commodities plunged, credit markets dried up and companies quickly entered survival mode. This caused even strong energy companies to lose their appetite for takeovers last year, but that could change this year. That’s because oil and gas assets are cheap, and Big Oil has deep pockets. Financing options will be more limited than in 2015. Few companies are safe, while the top tier can largely ride out a further year of low prices, the next tier down may have fewer alternatives. Corporate actions will follow, including asset sales.

Despite the uncertain outlook, major players will be looking toward long term strategic deals, while the more ambitious, better funded small caps will be looking to come out of this downturn ahead of peers. Private equity continues to remain poised for action. Valuations will soften. Those companies holding out for optimal pricing will be forced into action. We expect the two-tier market to accentuate. There will still be interest and competition for the best assets, while buyers will dictate the price of lower value assets.

Whichever direction, there will be opportunities and vulnerabilities created, and only an elite few are impervious. Pre-emptive company analysis and due diligence continues to be critical for any business selling for a premium price in 2016.

Clients trust Key Group to deliver a confidential and discrete sale process, to remove obstacles to close a transaction and ensure only the best prospective buyers with the capital and commitment to close a transaction make it to the closing table. In our experience, companies that are better prepared prior to the sale process have been rewarded with higher valuations, smoother due diligence and a quicker cycle to closing the transaction and getting paid.