• Cross-border M&A value rose by 14 percent in Q1 2016 versus Q1 2015, although deal volume fell 10 percent
  • Chinese outbound M&A hit a record USD83.2 billion for an individual quarter
  • However, China's domestic economic slowdown, Brexit uncertainty, volatile equity markets and the fall in commodities prices were significant negative drivers
  • North American buyers took advantage of affordable EU assets announcing 148 deals, representing 20 percent of all global activity by volume and 21 percent by value
  • The weak euro also saw Latin American corporates set a new record of USD8.9 billion in deals for EU targets, and inbound deal values rose 70 percent in the region over the same period last year, to USD8.3 billion.

Our quarterly cross-border M&A index reveals that despite a turbulent quarter for the global economy and capital markets see-sawing amid volatile risk asset sentiment, cross-border M&A proved surprising resilient, with Chinese investors looking to snap up bargains in the United States, while and North and Latin American companies looking to Europe for cheap opportunities.

In the first quarter of 2016, cross-border M&A value rose to USD324 billion, 14 percent higher than the first quarter of last year, while volume dropped 10 percent to 1,202 deals. The economic slowdown in China, the UK’s potential exit from the EU and volatile equities markets and the fall in commodities prices all contributed to the decline in volume. The trend of cross-border mega deals continued from 2015.

Both value and volume globally were down significantly on Q4 2015, as expected given it was the busiest quarter of a record year for M&A. Baker & McKenzie’s Cross-Border M&A index, which tracks quarterly deal activity using a baseline score of 100, dropped to 213 from its peak of 358 last quarter. However, it was still seven points higher than the same period last year.

These overall numbers also hide a recovery in activity during the quarter, as Michael DeFranco, Baker & McKenzie's global head of M&A explains:

"As expected, after a record Q4, dealmakers paused for breath at the beginning of the new year in light of macro noise from volatile capital markets, uncertainty over Chinese growth potential and political developments in the EU. However, while these headwinds dampened transaction activity initially U.S. equity markets then rebounded and Chinese companies demonstrated their economic power with record outbound investments, leading to a significant turnaround in March dealmaking."

Notably the majority of all M&A transactions in the first quarter have been cross-border, comprising 53 percent of value, well ahead of the 39 percent level seen in 2015 and the prior annual record of 43 percent seen in 2014. The most active sector by volume was Industrials with 194 deals in the quarter while by value Healthcare led the field with 92 deals worth USD54 billion.

China outbound hoists value

Outbound deals from China covered a number of sectors including chemicals, business services and consumer – revealing a desire to access advanced manufacturing techniques and technological know-how to build global brands. The biggest deal of Q1 2016 was the takeover of Swiss agrichemical company Syngenta by state-owned ChemChina for USD45.8 billion, part of an effort to boost its agricultural output in light of increased food consumption by the country’s growing middle classes.

Based on the deals to date, this trend will continue: total Chinese outbound M&A hit USD83.2 billion from 84 deals in Q1 2016 – a record value figure by Chinese acquirers for a single quarter.

DeFranco comments, "Chinese investors were extremely active in Q1 as they looked beyond their own borders for growth opportunities, supported by government-led initiatives to diversify the economy. This was after a record year for Chinese investment into the US and EU in 2015 as highlighted by our recent Chinese FDI study."

Low prices and inversions drive Stateside deals

North American acquirers were also busy in the first quarter, particularly in the EU, with 148 deals announced in Q1 representing 20 percent by volume and 21 percent by value. This reflects the steady revival of the US economy, the strength of the dollar and the affordability of assets in the EU.

The trend for large US companies to follow tax inversion strategies has also spurred several megadeals. These included the acquisition of Irish security and fire protection specialists Tyco International by automotive parts manufacturer Johnson Controls for USD16.2 billion and Mylan’s purchase of Swedish pharmaceuticals rival Meda for USD9.9 billion. Overall, North America was responsible for six out of the ten biggest global deals of the quarter, worth a total of USD66.7 billion.

In Latin America, bids for EU targets hit a quarterly record of USD8.9 billion in Q1. This is the result of two megadeals made by Inversora Carso, the investment vehicle of Mexican business magnate Carlos Slim: the USD7.4 billion acquisition of Spanish construction firm Fomento de Construcciones y Contratas and the USD1.4 billion acquisition of Spanish real estate firm Realia. Both deals took advantage of the weaker euro and low European real estate prices.

Looking inwards

The developed markets of the EU and North America have proven to be safe havens for inbound M&A in Q1. The EU saw 264 deals, while North America led the way in terms of value with USD77.9 billion – the US provided four out of the top 10 targets by value. The size and strength of the US domestic market and its status as the world’s largest economy explains the appeal of its businesses to overseas buyers, particularly in times of global instability. And this is set to continue. Despite the shaky start to the year, the rapid drop in volatility means an uptick in M&A activity in coming months seems likely and China is set to play a major part.

As DeFranco explains, there are plenty of reasons for optimism:

"The drop in energy costs could be positive for many sectors, such as manufacturing, and may result in increased profits and greater deal activity. Given the continued pressure on oil prices, distress-driven M&A is also likely to drive dealmaking in the energy sector during 2016."

DeFranco concludes, "Developed markets will continue to be an attractive target for acquirers from other regions in 2016, particularly investors from Asia-Pacific looking for growth opportunities. Meanwhile, the European Central Bank’s on-going quantitative easing program will mean that assets in the EU will continue to provide value for money opportunities among acquirers from both Asia-Pacific and North America. For risk-takers, UK assets look even cheaper as Sterling continues to fall amid Brexit uncertainty. Meanwhile, we fully expect further investments by Chinese companies in 2016 that will easily exceed records in both North America and Europe."

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