M&A Targets Shrink After Year of `Elephant' Deals, JPMorgan Says

  • Companies sitting on cash reserves of $6 trillion globally
  • More deals may happen in commodities, financial institutions

Megadeals will probably be replaced by a rising number of smaller acquisitions in 2016 as growing cash reserves keep last year’s record-breaking takeover momentum going, according to JPMorgan Chase & Co.

Solid economic growth in the last few years has given investors the confidence to seek out acquisitions while a growing pile of cash reserves, about $6 trillion globally in the fourth quarter, has left potential buyers with plenty of power, JPMorgan said in its M&A Global Outlook Monday.

Still, after last year, when five of the 20 biggest deals in history were announced, buyers might be looking at relatively smaller targets, the report said. There were 20 deals worth more than $30 billion last year, JPMorgan said.

“While the torrid pace of ‘elephant’ sized deals may slow, these may be partly replaced by a great number of large -- but relatively smaller -- deals that may end up fueling M&A activity in 2016,” the report said.

New deals could be driven by turbulent markets and troubled industries. Commodity-related sectors such as oil and gas and mining should see a pick up, the report said. Those companies are dealing with supply gluts and slowing demand from China that are driving down prices. Smaller banks facing an increasingly complex regulatory and compliance environment could also become targets.

There are already signs that the number of deals will rise, as acquisitions announced rose every quarter last year, according to data compiled by Bloomberg. There were more deals announced in the fourth quarter than any other in the last decade, according to data compiled by Bloomberg.

Europe’s Year

Regions that acquirers overlooked last year should get a pickup in deals as companies look for more cross-border deals, according to the report.

“Europe may attract more inbound activity as there is better visibility around the return of growth to the region, which may not be fully reflected in market prices,” it said.

That would be a welcome change for dealmakers on the continent. Last year, the proportion of spending on European targets hit its lowest level since 1998, according to data compiled by Bloomberg.

Asian Activists

Private-equity firms, supported by record levels of capital available, as well as a growing number of activist investors, may also trigger deals, the report said.

Shareholder activism, once a U.S. phenomenon, is catching on in Europe and some parts of Asia. Activist hedge funds controlled $122.9 billion in assets in the fourth quarter, according to the report. That could give this type of investor, such as billionaire Carl Icahn, the confidence to branch out into new geographies.

Asia, whose aging population is looking for better returns for pensions, could be a new frontier.

“Japan, China and Korea have aging populations and companies with more international investor bases, and family offices are often uniquely vulnerable to the favored tactics of some activists: a publicly embarrassing dispute played out in the media,” the report said. “Activists will globalize just as all investors have.”

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