- Telecommunications, health care, banks may be active sectors
- $3.8 trillion in M&A spending makes last year a record
After a record-breaking year for acquisitions, executives are looking for more.
Buyers splashed out $3.8 trillion on mergers and acquisitions in 2015, the highest amount ever, surpassing the previous record set in 2007, before the financial crisis, according to data compiled by Bloomberg. If anything, companies seem more optimistic about pursuing M&A than they were last year: in an EY survey published in October, almost 60 percent of executives expected to carry out acquisitions in the next 12 months, up from 40 percent a year earlier.
The fourth quarter was the busiest of last year, with $1.3 trillion in transactions announced, according to the data -- passing the trillion-dollar mark for the first time since the second quarter of 2007.
Investors could get an early indication of how the rest of the year might play out at next week’s JPMorgan Chase & Co. Healthcare Conference, the first major industry meet-up of 2016 and a traditional hot spot for early stage M&A talks.
Following Pfizer Inc. and Allergan Plc’s blockbuster $160 billion combination -- the biggest deal of last year -- health care once again looks set to drive dealmaking. Shire Plc is in advanced talks to acquire Baxalta Inc. for about $32 billion, people with knowledge of the matter have said, and a deal could be announced as soon as this week.
“M&A activity is likely to remain at elevated levels,” Eddie Yoon, portfolio manager and health-care sector leader at Fidelity Investments Ltd. wrote in his 2016 outlook. “Given the attractive free-cash-flow profile of the health-care sector, effective capital allocation to recharge a company’s growth prospects or lower costs through synergies should continue to create investment opportunities.”
Deal activity this year will be found in industries that need to add scale to deal with heavy competition or slowing growth, such as telecommunications, technology and health care, said Paulo Pereira, a London-based partner at financial advisory firm Perella Weinberg Partners in London.
Orange SA, France’s biggest phone company, said Tuesday that it’s in preliminary talks with Bouygues SA about its mobile-phone unit in a deal that would reduce the number of wireless carriers in the country.
Acquisitions of financial institutions, banking deals in particular, should also begin to pick-up in the months ahead as certainty and visibility emerge regarding the regulatory framework and capital requirements, such as the standards set by the Basel Committee on Banking Supervision, Pereira said.
During 2015, consumer companies, such as pharmaceuticals and food and beverage companies, commanded the biggest share of the spending at $1 trillion and featured the biggest deals of the year -- such as Pfizer-Allergan, and Anheuser-Busch InBev SA’s acquisition of SABMiller Plc for about $107 billion. That was followed by $751 billion in financial deals and $447 billion for purchases of industrial companies, including Warren Buffett’s Berkshire Hathaway Inc. agreeing to pay more than $30 billion to acquire Precision Castparts Corp.
British grocery store chain J Sainsbury Plc said Tuesday it’s considering an offer for Home Retail Group Plc, the owner of Argos and Homebase, in a deal that would combine two of the U.K.’s largest retailers.
The peak volumes seen last year depended on buyers’ optimism overcoming concerns about political and financial instability, according to Charles Jacobs, an M&A partner at law firm Linklaters. Dealmakers were able to shrug off a market rout in China, a slowdown in emerging markets and the Greek debt crisis during the last 12 months.
The U.S. decision to raise interest rates for the first time in almost a decade may cause a temporary lull in deals in the first quarter of 2016 and political tensions, such as the prospect of the U.K. exiting the European Union, could create “closed periods” that are unfavorable to large deals, he said in a note in December.
That said, with companies sitting on what Linklaters estimates is 2.4 trillion euros ($2.6 trillion) in cash, “sound deal fundamentals remain in place,” Jacobs said. “We see no reason for global M&A activity not to continue its record run in 2016.”