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Mid-Market to Drive 2016 M&A

After a year of big ticket mergers and acquisitions, 2016 will likely be a year of smaller deals to fuel consolidation. While there were fewer deals in 2015, compared with the previous year, the amount of money spent by companies…

After a year of big ticket mergers and acquisitions, 2016 will likely be a year of smaller deals to fuel consolidation. While there were fewer deals in 2015, compared with the previous year, the amount of money spent by companies to buy out others rose by a whopping 40.8 percent to $4.6 trillion. That growth was mainly fuelled through some mega-mergers that accounted for an estimated $1.6 trillion in M&A activity this year.

The biggest of those deals was Pfizer’s $183.7 billion spend to buy Allergan. The deal was the largest so-called inversion deal ever. An inversion occurs when a U.S. company merges with a foreign company and reincorporates overseas in order to avoid American corporate taxes. Financial engineering also played a major part in the $120 billion merger of chemical conglomerates Dow Chemical Co and DuPont. The deal was structured so that the subsequent spin-offs of the combined companies’ divisions would be tax-free.

Last year’s mega deals also included many with long-expected operational efficiencies, such as brewer Anheuser-Busch Inbev SA’s $106 billion acquisition of SABMiller Plc, and oil major Royal Dutch Shell Plc’s $70 billion purchase of BG Group Plc. Eighteen deals in 2015 exceeded $30 billion in value and made up a quarter of the year’s total volume, but that high value deals trend is unlikely to continue next year where the focus will be on consolidation.

Gary Posternack, global head of M&A at Barclays Plc. told Reuters

“While the absolute dollar value of deals could very well decline in 2016, we expect the number of deals to increase year-on-year as the market broadens and we see more mid-sized transactions.”

A major difference has been the absence of big leveraged buyouts. Private equity firms have mostly been sitting on the sidelines, preferring to sell companies to other strategic buyers, rather than trying to outbid them in auctions. A choppy junk debt market in the last few weeks has made it even more difficult for buyout firms to be competitive. Also, the M&A market could slacken in 2016 if the economy and political environment turns sour. Primarily, dealmakers have been speculating whether central banks in the developed world raising interest rates could dampen dealmaking.

However, the number of transactions could increase next year as newly merged companies sell non-core assets and smaller companies consider tie-ups to stay competitive, according to experts. Indeed, BankerBay data shows a healthy appetite for middle market M&A activity going into 2016. Currently, the BankerBay M&A vault hosts over 500 sellers with total revenue of about $10 billion but more importantly over a 100 buyers are lined up to acquire companies and have the appetite to invest up to $25 billion. The vault contains buyers who are looking to acquire companies with annual revenue of up to $2 billion.

Watch this space as we highlight the biggest deals that hit the market in 2016! Wishing our readers a very happy new year.

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