Dealmaking Boom Set to Continue Next Year Despite Headwinds

  • Health care, technology will continue to lead the way in deals
  • Oil and gas volumes also expected to pick up next year

Dealmaking is set to continue its bumper run into next year, despite an anticipated interest rate rise in the U.S. and risks from global economic hot spots.

As the U.S. economy continues to grow, the world’s biggest companies will seek to expand through mergers and acquisitions, Paul Parker, Goldman Sachs Group Inc.’s co-chair of global M&A and JPMorgan Chase & Co.’s Kurt Simon, global chair, mergers & acquisitions, said in a Bloomberg Radio interview. Despite record levels of M&A in 2015, there’s still plenty to be done.

“We haven’t seen anything abating in our backlog,” Parker told hosts Cory Johnson and Carol Massar on “The Bloomberg Advantage.”

M&A activity this year already passed its annual record, after Pfizer Inc.’s agreement to combine with Allergan Plc pushed the value of deals past highs set in 2007, according to data compiled by Bloomberg. Deals over $10 billion are also setting records, with 65 announced so far this year, compared to 41 in 2007, Parker said. However, despite a rise in mega deals, valuations are coming down: Parker noted that companies paid about 11.5 times earnings before interest, taxes, depreciation and amortization this year, less than the 13 times Ebitda they paid in 2014.

That doesn’t mean that it’s all clear ahead, with the Paris bombings, tension between Turkey and Russia, as well as China’s slowdown all weighing on confidence among executives. Dealmakers will also be wary of the widely expected interest-rate hike from the U.S. Federal Reserve, ending an era of near-zero rates.

Still, the cost of capital is “incredibly low,” according to JPMorgan’s Simon, and in an environment where organic growth is hard to come by, deals should remain high on the to-do lists of otherwise strong companies.

Goldman Sachs ranks first for advising on M&A this year, with a market share of 36.5 percent, according to data compiled by Bloomberg. JPMorgan is ranked second with a 34.4 percent share of deals, the data show.

Health Care, Technology

The health-care industry, which led the charge this year with deals including Allergan’s $160 billion combination with Pfizer, should still be an active market for M&A next year, Simon said. He added that he couldn’t comment on that particular deal as JPMorgan is advising Allergan.

Technology, which saw Dell Inc. make a $67 billion cash offer for cloud data storage company EMC Corp., should also continue to be a strong area for deals, he said.

“I will go out on a limb and say oil and gas,” Simon added. “You will see companies with strong balance sheets teaming up with companies with strong assets.” Parker said that activity among natural resources companies in particular was likely to be high, adding that companies may rely on stock, instead of writing big checks for desirable acquisitions.

Activist Investors

There’s likely to be little rest from activist investors at the table demanding deals, Parker said -- though their tactics could change. More activists may make demands along the lines of Nelson Peltz’s campaign at General Electric Co., which is pushing the conglomerate to sell some assets while buying others that make more sense for its strategy, Parker added.

All in, circumstances should combine to make next year another home run for M&A advisers. “It’s been incredibly busy,” Parker said. “It’s sort of the World Series.”

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