Dealmakers Ignore Choppy Markets After Busy Summer for M&A

  • After a $1 trillion-quarter for deals, activity may slow down
  • Companies planning IPOs more affected by choppy stock markets

Worried about China’s economic slowdown, oil at its lowest price in six years or Volkswagen AG’s diesel scandal? Dealmakers aren’t. Yet.

More than $1 trillion of mergers and acquisitions were announced in the third quarter, over 20 percent higher than the same period last year, according to data compiled by Bloomberg. And that’s without including what could be the biggest acquisition of the year -- Anheuser-Busch InBev NV’s intention to make a takeover proposal for rival brewer SABMiller Plc. First revealed on Sept. 16, analysts have said a deal could be worth more than $100 billion. Forget a quiet summer; M&A markets just had their busiest September on record.

Companies are still hungry for deals, and willing to pay large premiums for major M&A opportunities, according to Ferdinand Mason, a partner at law firm Jones Day in London. While the flow of transactions has been steady across sectors, activity has been especially high in the pharmaceuticals and telecommunications, media and technology industries, he said.

“Economic instabilities are showing no sign of dampening appetites for deal-making,” Mason said in an e-mail. “Every time I think we’ve reached a peak, there’s a new announcement.”

Among the biggest deals in the quarter, Israeli drugmaker Teva Pharmaceuticals Industries Ltd. agreed to buy the generic-drug business of Allergan Plc for about $40.5 billion in cash and stock in July, while billionaire Warren Buffett’s Berkshire Hathaway Inc. bought aerospace equipment maker Precision Castparts Corp. in August in a deal valued at $32.7 billion.

Market Rout

While dealmakers shrugged off a market rout in China that saw the country’s benchmark stock market fall by 25 percent from July through September, their confidence may be difficult to sustain. As the final quarter gets going, stocks, commodities and currency funds are all in the red, while emerging economies are weakening and some corporate profits have slumped.

The instability could threaten the so far robust M&A pipeline, according to Hernan Cristerna, co-head of global M&A at JPMorgan Chase & Co. in London.

“While that’s not yet a sufficient risk to derail any deals that are already at an advanced stage, it could pose some risks for transactions to come next year,” Cristerna said in a phone interview. “M&A is all about confidence and the level of CEOs’ enthusiasm, and willingness to engage in large transactions is waning somewhat,” he said.

Some deals have already been affected by the uncertainty. Potash Corp of Saskatchewan Inc. said Oct. 4 it withdrew a 7.85 billion-euro proposal to acquire German fertilizer K+S AG, citing significant declines in commodity and equity markets as well as a lack of engagement by K+S management.

Companies planning to go public are also feeling the heat. While M&A had a robust three months, choppy markets pose a greater threat to the companies and buyout firms considering initial public offerings as a exit alternative to their investments. For several of those that announced their intention to float during the third quarter, the next few weeks will be crucial.

Bayer AG cut the amount it wants to raise from the initial public offering of its Covestro plastics unit by 1 billion euros ($1.1 billion) to generate sufficient investor appetite, after saying on Sept. 18 it planned to raise about 2.5 billion euros. Car-parts maker Schaeffler AG, meanwhile, on Monday cut the number of shares it plans to sell in its IPO. The company is now seeking to raise only about 975 million euros as well as delaying the listing date, after the auto industry was buffeted by the Volkswagen emissions-testing scandal.

Concerns over U.S. interest rates rising, the global macro-economic environment, as well as steep movements in stocks like Glencore Plc and Volkswagen have affected investor liquidity and risk appetite for equities, according to Richard Cormack, co-head of equity capital markets for EMEA at Goldman Sachs Group Inc.

The volatility makes it harder for some regions and sectors than the others. “We are not seeing a lot of commodities or emerging market IPOs in the market now and wouldn’t expect to at this time in the cycle,” said Cormack. “Emerging market stories are more vulnerable.”

Companies raised about $11 billion from IPOs globally last quarter, the smallest amount in at least two decades, according to data compiled by Bloomberg.

Valuation Expectations

On the flipside, volatile markets may actually encourage acquirers on the hunt for a bargain, according to Mark Todd, co-head of U.K. M&A at Barclays Plc. With an average premium of almost 22 percent paid for deals agreed this year, the decline in equity capital markets may help temper seller’s valuation expectations, boosting activity at lower prices.

“We are expecting a strong finish to the year in the U.K.,” Todd said by e-mail. "Funding remains abundant and equity markets, although they are somewhat more choppy than earlier in the year, remain supportive of the right M&A deals."

Even if that strong year-end happens, the outlook may start to look bleaker in 2016, as growing uncertainty drags on months-long M&A processes. And while stuttering economic growth may drive companies to sell themselves, or make strategic acquisitions, not every target can be first pick in the draft.

“We’re seeing a lot more fish in the M&A river, talking about combinations,” said Jan Skarbek, who heads Citigroup Inc.’s U.K. investment banking practice. “But only a proportion actually go into the net.”

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