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Less than a month into his role as head of German conglomerate Bayer, Werner Baumann decided to launch the biggest takeover in the company’s 153-year history. Four months later — and just a few weeks ago — the former finance director had successfully convinced US agribusiness giant Monsanto to accept a $66bn offer that will position the combined group as the world’s most powerful supplier of crop chemicals and seeds.
The calculations made by Mr Baumann help explain why dealmaking and in particular, large cross-border transactions, remain a major feature of global markets.
First, it was a sector that had accepted a need for massive consolidation. Second, it was an opportunity to gain scale in new markets. And finally, debt financing remained abundant at historically low rates — with central banks even stepping in to purchase corporate debt to stimulate activity.
Those three factors have played a critical role in pushing companies to pursue ambitious transactions, despite a series of unexpected political events — such as the UK’s vote to leave the EU and the rise of Donald Trump’s candidacy in the US — destabilising markets.
“Most of the developed world is short of growth, but long low-cost capital,” explains Alasdair Warren, head of investment banking across Europe at Deutsche Bank. “The recent data suggest we are likely to see rate rises in the US, but it’s clear that the pace of rate increases thereafter will be very slow. In Europe, we will be in low-growth and low- or negative-rate territory for the foreseeable future. That means corporates are going to have to continue to look at M&A to drive growth and returns.”
So far this year, more than $900bn-worth of cross-border deals have been agreed, accounting for about 40 per cent of the $2.37tn of transactions so far in 2016. While Bayer’s deal was the largest M&A transaction this year, a number of other megadeals were reached in the three months to the end of September.
Danone, the world’s largest yoghurt company, struck its biggest deal in a decade with a $12.5bn agreement to buy WhiteWave Foods, a US maker of upscale natural beverages and health-focused foods. Japan’s SoftBank agreed to buy UK chip-designer Arm Holdings for £24.3bn in a bet that it will become a leader in the “internet of things”. And Spectra Energy, a US pipeline provider, reached a $28bn all-share deal to merge with Canadian rival Enbridge.
Scott Simpson, a London-based corporate partner at law firm Skadden Arps, says the post-Brexit environment appears to be settling down and longer-term trends are emerging that will drive cross-border M&A. “In light of UK and European uncertainties, and given continued growth opportunities in the US, it appears that UK and European companies will seek to deepen their investments in the US,” he argues.
In the short term, at least, advisers are optimistic that the UK’s participation in global dealmaking is set to pick-up.
In the first nine months of the year, UK involvement in M&A fell to 8 per cent of the total activity — its lowest level in at least two decades. But there have been signs of life. In addition to the takeover of Arm, UK-based Micro Focus agreed a $8.8bn deal to merge with a set of software assets spun off from Hewlett Packard Enterprise and Liberty Media reached a deal to take control of Formula One in a deal valuing the sport at $8bn.
Gary Posternack, global head of M&A at Barclays, says: “There have been some big UK deals already and, generally, people are back looking for opportunities. The dynamic might change once the UK has negotiated new terms with Brussels but until then we are likely to see continued activity.”
But one area where cross-border deal activity has run into trouble is in China. Despite already shattering the last year’s record for total outbound dealmaking, Chinese bidders are struggling to navigate internal bureaucracy and negotiations to clinch more transactions.
Following an unprecedented level of activity in the first quarter — during which ChemChina struck the biggest outbound Chinese transaction ever with a $44bn deal to buy Swiss agribusiness Syngenta for $44bn — Chinese buyouts moderated in the second and third quarters, adding $40bn during the six months.
Deal volume has remained strong but regulators in China have increased their scrutiny of outbound M&A in recent quarters, slowing down the execution of some of the acquisitions.
Several people involved in Chinese outbound dealmaking said the State-owned Assets Supervision and Administration Commission, which oversees state groups, has warned companies on “reckless dealmaking”, overpaying or losing money on overseas acquisitions.
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“It’s a conundrum for the companies to be in — they are not expected to sit back and do nothing,” says Philip Li, a partner at Freshfields Bruckhaus Deringer in Hong Kong, noting that the central government has long called on state groups to lead the way in buying foreign technology and resources.
Other watchdogs have weighed in publicly on what they see as problems with the flood of overseas deals. Last week, a director at China’s foreign exchange regulator discouraged acquisitions that were done for prestige or political gain, according to Chinese media. A Ministry of Commerce official also warned on “blindly” going into deals and accruing high levels of debt to pay for overseas asset purchases.
“It seems that the government would discourage hasty acquisitions made by some acquirers which result in high leverage ratios at some of these companies,” says Kiki Yang, a greater China partner at Bain & Company in Hong Kong.
While state groups have suffered setbacks from regulatory scrutiny, and many are now engaged in restructuring their businesses at home, private Chinese companies have continued to make advances in cross border deals in 2016. Many of the year’s largest deals were conducted by private companies.
“The change in direction of deal flow from state-owned enterprises [SOEs] to privately-owned businesses has been apparent,” said Stephen Gore, head of Asia Pacific M&A at Bank of America Merrill Lynch. “For SOEs, there is a balancing out of those that are focused on domestic reorganisation resulting from SOE reform and those that are still doing overseas deals.”
Asia’s investment banking fees are running at all-time highs, but companies in the rest of the world are spending sharply less on advice for deals and fundraising, leaving investment banks with a big revenue problem.
Thomson Reuters figures show that investment banking fees, which include money paid for mergers & acquisitions, equity and debt raising and loans, jumped to their highest ever level in Asia Pacific, excluding Japan, during the nine months to end September.
The 13 per cent rise in Apac fees year-on-year was aided by a buying spree from Chinese companies, who have already done more outbound M&A in 2016 than in all of 2015. The increase bodes particularly well for investment banks like UBS and Credit Suisse that have been increasing their operations in the region.
Still, the overall news was grim and will not help an investment banking industry that is struggling to create revenue growth.
Global investment banking fees fell 15 per cent year on year, led by a 22 per cent fall in fees in the Americas and an 18 per cent fall in Europe — both regions much bigger than Apac. Japanese fees fell 10 per cent, and Africa/Middle East was down 1 per cent.
Europe — the second biggest fee market in the world — is running at its lowest level since 2004. The Americas region — which is more than three times the size of Europe — is at its lowest level since 2012.
Debt capital markets were the strongest performer for banks, with fees rising 7 per cent as companies took advantage of ultra low interest rates to raise money from bonds and commercial paper. Equity capital markets fell 33 per cent in the nine months, to their lowest level since 2003. Fees from loans were down 28 per cent year-on-year, while M&A fees fell 9 per cent.