Last week, Thomson Reuters hosted their quarterly Trends in Deal Making webinar for Q3. Matthew Toole, Director of Deal Intelligence for Thomson Reuters, and Jeffrey Goldfarb, US Editor of Reuters Breakingviews, recapped some of the major highlights for the quarter, and made some predictions of what to expect for the remainder of 2014. We’ve brought together some of the highlights:
Investment banking fees
Investment banking fees are at their strongest levels since 2007. Though slightly depressed from Q2, Q3’s results were still up 13% from 2013. Composition of global asset class fees converged around 25% for the second time this year, with M&A numbers expected to pick up in last part of this year.
Global IB fees for the first 9 months of 2014 are up 14% YoY, to $69.2 billion. American IB fees account for 54% of this, up 8% compared to 2013. The EU has also surged, with a lot of M&A strength coming from Germany’s outbound deal activity. However, Europe is recovering from from a very low base to begin with, with investment banking fees at record lows over the last five years. Other regions to have experienced impressive YoY change in 2014 include China (+53.9% ), Spain (+84.3%) Canada (+27.6%) and Australia (+38.1%).
Worldwide M&A activity
Worldwide mergers are up 59% for the year ($2.7 trillion), despite a double digit percentage decline in Q3. Year-over-year it’s the strongest increase since 1997/98. A number of spin-offs, mergers, break ups and a flurry of corporate activity has driven this growth. Jeffrey Goldfarb highlighted two major themes that emerged in Q3;
- The pursuit of ambitious “big-ticket” deals
- The growing influence of activist investors
Last week’s news of an attempted Rio Tinto/Glencore deal in August highlights that CEOs and Boards are taking big swings to land mega deals. Many companies are resisting these opportunistic deals (e.g. Time Warner, Pfizer, Valeant). The question remains if buyers will accept these decisions and move on, or come back with harder offers. If they do, this may lead to a surge of bigger, more overvalued deals in the future. We haven’t seen strong signs of this yet, except perhaps in the tech space.
2014 has been a very busy year for activist investors, with Valeant, eBay, and Yahoo all feeling the heat. With so much activity in this arena, we’re likely to see at least some of these activists get their way. However, while people may get excited when an activist takes a position, it can take 3-4 quarters to see anything come of it. The recent eBay/PayPal split, for example, was a move Carl Icahn had called for years ago.
Large cap deals
The number of large cap deals ($5B+) is up 138% YoY, with US target companies involved in the Top 5 deals. However, there’s a lot of uncertainty as to whether many of these mega deals will pan out (Valeant, Comcast, T-Mobile etc.). 2014 results might therefore not be as big as everyone thinks.
Cross-border M&A activity is up 119% from 2013, accounting for 40% of worldwide deal making activity. Tax inversions have been a big driver of this growth, especially in the US, but we’ve also seen significant cross-border activity from Germany, China and Japan. Jeffrey Goldfarb suggested deal inversions to be a terrible idea, especially in view of the fact that the US is expected to undergo a corporate tax reform in the near future. Any gains from recent overseas acquisitions are likely to be short-lived unless these companies have picked a good strategic partner.
Despite the downside of inversion deals, their popularity does speak to a new level of confidence in economic conditions around the world. Tax inversions have largely been performed by pharmaceutical companies and, to a lesser extent, mid-size tech companies; industries which typically have large portions of cash housed overseas. However, the US Government’s regulatory push against tax inversions will likely slow this activity significantly.
Worldwide PE-backed leveraged buyouts have declined 22% in 2014 (although 2013 figures include the Dell and Heinz deals). Instead, we’ve seen a lot of PE-backed IPOs this year, but it’s been mostly on the sell side, not the buy side.
Private equity started 2014 with $1 trillion in dry powder, and continued to raise huge funds throughout the year, creating a deluge of capital. They now face the problem of having too much cash than they know what to do with, unable to compete with strategic acquirers who can offer company synergies, tonnes of cash, and valuable stock offerings. Facing such a difficult market, PE firms might be forced to hand back capital, or ask their investors for funds to be extended. The next 2 years will be critical for private equity.
The global IPO market has seen a flurry of activity in 2014, up 94% over 2013, the strongest year for global listings since 2007. It’s been the USA’s strongest year by number of deals since 2000, though we’ve also seen a triple digit increase in the EU and Hong Kong.
There’s been a return to some sensibility in the IPO market, with a lot of big IPOs from 2013 missing their first earnings targets and spooking investors. Driving the momentum of the IPO market are portfolio companies, on the hunt for new investment opportunities after buying back their own shares.
Predictions for Q4
While global M&A activity continues to perform well, Goldfarb suggests we saw a lot of the pent up demand toward the start of the year, so Q4 is unlikely to yield many big surprises. He also speculates that a lot of the bigger anticipated deals will fall apart or be shot down by regulatory hurdles. We await the verdict.