• Inbound deal values rose 70 percent in the region over the same period last year, to USD8.3 billion (America, France and UK are top investors) as growing middle class drives higher demand across the region
  • Brazil and Mexico achieve highest number of inbound deals, but Chile and Colombia follow hot on their heels
  • Energy and Industrial sectors prove most attractive
  • Weak euro sees Latin American corporates set new record of USD8.9 billion for M&A deals in Europe (Spain and Portugal top spots)
  • Globally cross-border M&A value rise to USD324 billion in Q1 2016. 14 percent higher than Q1 2015, despite volumes dropping 10 percent to 1,202 deals

Our quarterly cross-border M&A index reveals that despite a recession, political turmoil and corruption scandals in key economies, Latin America remains an attractive target for acquirers, particularly from the EU and North America. At the same time there was record activity outside the region by Latin American companies.

Lower exchange rates in the region, along with declining profits that are pushing domestic owners to sell off distressed assets, have made targets cheaper. Many companies have also been hit by corruption scandals that have compelled them to divest assets at attractive prices.

“These aren’t the drivers you usually want but they have contributed to keeping M&A activity at reasonable levels,” said Jaime Trujillo, Chair of Baker & Mackenzie’s Latin America M&A Practice. “Many of the decision-makers at the helm of Latin American companies have never experienced this level of volatility. They aren’t used to taking the long view, which is why we believe deals will be driven by investors outside the region.”

Latin America’s fast growing middle class, the result of the commodities boom prior to the recent slump, is also a major draw for foreign investors. The World Bank estimates that close to half of Latin America’s population will qualify as middle class by 2030, a shift that is already changing the focus of M&A activity.

While Brazil and Mexico had the highest number of inbound deals in 2015/16, smaller countries like Chile and Colombia were close behind. Much of this activity is driven by growing demand from the region’s expanding middle class for consumer products as well as the business and financial services that provide the means to purchase them.

In comparison to a modest 2015 where although the number of outbound deals from Latin America remained steady, values dropped to a six-year low of USD15 billion outbound investment by Latin American companies into Europe 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 US$1.4bn acquisition of Spanish real estate firm Realia. Both deals took advantage of the weaker euro and low European real estate prices.

Global outlook

This sits against a global backdrop which witnessed cross-border M&A value rise to USD324 billion in the first quarter of 2016. This is 14 percent higher than the first quarter of last year, despite volumes dropping 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 US$45.8bn, 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.

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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