Is China putting record-breaking M&A in jeopardy?
The unexpected plunge in Chinese financial markets this Summer has caused many investors to start worrying about their positions. As a matter of fact, the financial sector will not be the only one to bear the costs of such a tragic rout.
The global economy is stuck in a phase of transition in which the most developed ones are trying to bring monetary policies back to normality. The attempts of the United States to hike the Federal Reserve rates have been seriously undermined and it would hardly be possible to see a rise in interest rates by the end of 2015.
Emerging economies, such as those among the BRICS whose performances principally rely on Chinese demand for labour-intensive products and commodities, are facing the end of the powerful roaring growth period that started with the turn of the century. Not surprisingly, commodity prices are diving. Oil hit its six-year low. Gold prices followed suit. Bloomberg-picked 22 commodities showed the worst down since 1999. But it doesn’t stop here.
Accounting for 15% of the world’s GDP, China’s crash has legitimately raised many concerns among economists. Undoubtedly, a 2008-style economic wreck is not even imaginable. This time there is neither a mispricing of a class of risky assets nor excessive interconnection between credit institutes to worry about. However, the huge volatility experienced might have had serious consequences on one of the hottest market so far this year : the M&A industry.
Global mergers and acquisitions activity recorded ground-breaking performances in the first half of 2015. In the end of July, Intralinks and EY Consultancy reported a total volume of $2.3tn represented at 52% by the United States. Among the most important deals, the 55-billion Charter-Time Warner operation and the roughly 50-billion Heinze-Kraft merger were particularly noteworthy.
However, the M&A market was just getting warmed up. A survey conducted by PricewaterhouseCoopers revealed that 54% of the CEOs in the United States aimed at concluding an acquisition by the end of this year. The key drivers of this substantial surge are the low borrowing costs, which entitle firms to finance themselves in a relatively cheap way, and the strong earnings generated by those companies that, having already sound balance sheets, are highly incentivised to opt for growth strategies. Figures on valuations were even more striking. In the United States, transactions averaged 16.5 times earnings before interests, taxes, depreciation and amortisation. It was the richest half year ever, with 31 deals over $10bn. The scenario looked really promising and confidence for an extraordinary conclusion seemed more than reasonable.
Summary table of the largest global deals reported in the H1 2015. Note that, despite being announced, not all of them closed as of today. For instance, the Syngenta-Monsanto operation is currently under threat.
According to Credit Suisse reports issued in September, the total M&A volume was expected to be around $4.8tn for the year, up around $100 million with respect to the previous record high registered in 2007. But this seemed no longer obvious during last weeks, when the huge market volatility led to worrying slow-downs. Many big operations, such as the Syngenta-Monsanto deal for which a fair conclusion is currently not expected, were stuck in their gaming phase. For a while, companies feared potential misevaluations arising from changeable prices.
Furthermore, their portions of revenues coming from Asian markets were at serious risk. With Chinese recent IPOs struggling for national economic issues and Europe still unable to see the substantial effects of the first Quantitative Easing round, the M&A market was about to freeze. In a Bloomberg podcast, co-head of global M&A at Citigroup Peter Tague said “We are tracking toward the year that could actually be the largest on record. Given that we are up about 40% on volume, it seems like it is something achievable. Although if the market blinks, it may not get there.”
These concerns were still highly debated prior to the release of data on the third quarter of the year. Despite a small decrease in the number of completed deals, Thomson Reuters reported that companies around the world accounted for M&A activity worth $867 billion, well above the $820 billion in the previous quarter. As Stanhope Capital Chief Investment Officer Jonathan Bell argued during an interview with Bloomberg, the huge market turmoil prevented some deals from being closed because of discrepancies in the price determination, but this will on the other hand give the opportunity to other deals to come forward. It should be noted that investment banking giants took advantage of these excellent performances and obtained huge gains in terms of fees. Goldman Sachs ranked first, representing 38.5% of the total market share, followed suit by Bank of America (22.2%) and Morgan Stanley (20.3%).
Deal count for major investment banking institutions. It should be noted that the sum of the market shares is more than 100% since more than one institution were involved in many single deals.
Personally, I am firmly convinced that there is enough evidence to forecast a successful conclusion of the year for global M&A. Though I repute that Chinese instabilities have yet come to an end. Undoubtedly, they will not bring about an immediate collapse of the Chinese economy, but China’s extraordinary growth might be progressively eaten away if no serious measure is taken anytime soon. This will imply a new wave of volatility on the market, perhaps larger and more disruptive. Thus a question sounds legitimate: despite the record-breaking performance of 2015, will M&A still be running in the fast lane in 2016?
WRITTEN BY NICOLA BRUSSOLO FOR BESA
PLEASE DIRECT ANY INQUIRY TO AS.BESA@UNIBOCCONI.IT