You Shall Not Merge!


M&A activity in 2015 has surpassed the peak from 2007 driven by deals in pharmaceuticals, energy, and consumer sector. Many of the factors that helped the dealmakers in 2015 are still in place, but the bond market turmoil and geopolitical instability might play a role in 2016 together with other factors that are yet to be discussed.

A bit of “history”

During the crisis, there was a lot of volatility and anxiety which brought uncertainty and decreased the willingness of the CEOs to spend company’s money and invest. Moreover, in the wake of the financial crisis, companies hunkered down and slashed costs. Eventually, margins picked up even if global economic growth was uneven. The GAAP S&P profit margin peaked in late 2014. But slow economy and deflation combined to make it hard for revenues to grow organically. There were $450bn of annual buybacks among the S&P 500 but EPS for the index did not grow in 2015, and the outlook for 2016 is not that much better.

If a company cannot grow organically, it has the other option – merge and acquire. In fact, some of the factors that pushed mergers and acquisitions in the past 2 years were hunger for growth in a weak economic environment, cheap financing and continued pressure from activist shareholders to boost returns. Many of these factors are still in place and those factors positively affect the environment. 2015 has brought the global M&A value to about $5tn. It is important to mention that it was a year abundant of the so called mega deals. These are deals that surpass $10bn in value. A record 67 deals with a value of more than $10bn have been agreed, worth a total $1.86tn. That’s more than double when compared to 2014 total of $803.4bn. There have been 9 deals announced worth more than $50bn, also a record.

2016, are you up to the task?

The story of 2016 started in a ‘slightly’ different fashion. This year has already seen 4x the value of withdrawn M&A deals compared to the same period last year ($375.8bn vs $90bn) and with the US Department of Justice suing to block a $25bn deal between Halliburton and Baker Hughes, that figure could get higher. The value of 2016’s withdrawn deals is the highest since 2007 in which, during the same period, we saw $405.9bn of value in withdrawn deals. It is interesting to mention that there have been only twelve M&A deals announced with a value above $100bn in the history of M&A. Two of those deals happened in 2016 and were both withdrawn: Pfizer’s acquisition of Allergan ($160bn) and Honeywell’s acquisition of United Technologies($102.8bn).

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