Photographer: Tomohiro Ohsumi/Bloomberg

Chinese Hunt for Deals Helps Offset Weaker First-Quarter for M&A

With U.S. and European companies and investors still digesting last year’s record deal volumes, 2016 is off to a slower start in mergers and acquisitions. Amid volatile markets and political uncertainty, one bright spot has emerged: China.

Global M&A activity in the first quarter dropped 11 percent from a year earlier to $621.5 billion, according to Bloomberg data. Most of the negotiations for the two biggest deals announced so far—China National Chemical Corp.’s $43 billion offer to buy Syngenta AG and Shire Plc’s $32 billion acquisition of Baxalta Inc.—happened last year.

Without Chinese buyers, that number would have been much lower. Companies based in China announced $97 billion in overseas deals in the first three months, as part of an unprecedented shopping spree that’s already close to topping the total amount spent in either of the last two years.

Below, top investment bankers based in the U.S. and Europe share their views on dealmaking in 2016: how stock market volatility and political uncertainty is affecting transactions, China’s hunger for acquisitions and why there’s still optimism that M&A will remain robust for the rest of the year.

Gilberto-Pozzi-360

Gilberto Pozzi, co-head of global M&A at Goldman Sachs Group Inc., based in London

Deal activity in the first quarter has been lower than anticipated due to market volatility, widening credit spreads and a perception of increased macro risks. We remain confident in a rebound for the rest of the year as financing markets have regained liquidity, equity capital remains widely available and corporates continue to see M&A as the best way to generate earnings growth in an otherwise slow-growth environment.

Robust Chinese M&A activity was primarily driven by a combination of decelerating growth in China, leading companies to diversify across geographies, and government support on foreign strategic acquisitions. These are strong tailwinds which direct towards continued outbound Chinese M&A activity for the rest of 2016 and beyond.

Anu-Aiyengar-360

Anu Aiyengar, head of North American M&A at JPMorgan Chase & Co., based in New York

We are seeing fewer mega deals, yet the number of deals has increased. In 2016, we expect to see increased activity in the diversified industries and certain parts of financial services, to complement continued—albeit lower-than last year levels—in health care and technology.

China’s outbound activity has been at an all-time high, driving a third of all cross-border activity this quarter. Macro and demographic trends are favoring upgrading and the expansion of Chinese businesses globally. They are either looking for great brands or good technology, or areas like travel and leisure that can leverage the gigantic wave of expected tourism. We are seeing Chinese buyers hiring advisers early to successfully navigate transactions.

Berthold-Fuerst-360

Berthold Fuerst, co-head of M&A EMEA at Deutsche Bank AG, based in Frankfurt

We’ve had a decent start to the year in terms of M&A volumes in EMEA. However, stripping out the biggest transactions so far this year, activity feels a bit more muted overall, so the jury is still out on whether we will continue to see year-on-year volume growth for the remainder of 2016.

M&A activity involving Chinese companies has dramatically increased in recent months. As Chinese economic growth slows down and the currency has been devalued, companies want to diversify and look for growth abroad. Funding is still available, and they want to deploy the enormous amounts of cash they have before any further changes in currencies.

Beyond slowing growth in China, market volatility, and geopolitical risks, other events such as Brexit could slow down M&A in Europe, at least temporarily. Despite those risks lurking on the horizon, the drivers of continued M&A activity look to be in place.

Larry-Hamden-360

Larry Hamdan, Head of Americas M&A, Barclays Plc based in New York

While 2015 was the year of the megadeal, 2016 may be the year of the cross-border deal. About 40 percent of Q1 volume was cross-border, driven by an uptick in European and Asian purchases of U.S. targets. Overall 2016 M&A volumes will be below the 2015 peak, but we expect activity levels to be strong relative to recent history.

Leading Chinese companies now want to be global champions. So we’re seeing them execute larger deals in the U.S. and Europe, and become increasingly competitive in M&A auctions. We expect China outbound M&A to continue as they seek to bring leading international brands and technologies to their home market and to drive growth by expanding into new geographies.

Dietrich-Becker-360

Dietrich Becker, a partner at financial advisory firm Perella Weinberg Partners in London

While there’s a lot of uncertainty out there, we expect M&A activity to continue. Companies are not as indebted as they were a few years ago, funding remains cheap and CEOs are still bullish about strategic transactions amid the general absence of growth.

There are many challenges that could have some impact on M&A, including stock market volatility, lower growth in China, elections in the U.S., the looming Brexit referendum and geopolitical unrest in the Middle East. Taking those into account, there’s still appetite for M&A driven by strategic rationale.

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