Political and macroeconomic uncertainty as a result of tightening US monetary policy, Brexit, and the upcoming US Presidential election have continued to stifle cross-border M&A activity, according to Baker McKenzie's Cross-Border M&A Index for Q3 2016.
Buyers announced 1,275 cross-border deals worth US$373bn, dropping 22% in volume and 5% in value compared to Q3 2015. However, large multinational strategic buyers' focus on growth through acquisition pushed cross-border valuations up 64% from Q2 2016. As a result, Baker McKenzie's Cross-Border M&A Index, which tracks quarterly deal activity using a baseline score of 100, increased to 238 for Q3 2016, up 23% from the prior quarter but down 10% from Q3 2015.
The dip in deal volume this quarter was not a surprise for many as mid-market M&A volumes traditionally dip around US elections and we continue to experience political and macroeconomic uncertainty globally. On the flip side, while still down from a year ago, we are beginning to see a re-emergence of the mega deal.
Michael DeFranco, Chair of Baker McKenzie's Global M&A Practice
The increase in deal value was largely driven by renewed confidence at the upper end of the market with several blockbuster deals being announced. While deals above US$1bn were down 25% when compared to Q3 2015 they were a regular occurrence, particularly for inbound deals into the US.
Regions and Sectors
Despite shockwaves sent through the EU M&A market in Q3, due to the results of the UK referendum, EU outbound deals accounted for 44% of all cross-regional M&A value in Q3. Deals from the EU into North America saw record values with US$105bn from 121 deals, an increase of 32% year-over-year. Cross-regional EU inbound deal volume slumped by 30% when compared to Q2 2016 and 24% compared to Q3 2015.
Asia-Pacific buyers carried out 174 cross-regional deals in Q3 worth a record high US$86bn, an increase in value of 30% on Q3 2015 and 67% on Q2 2016, representing 32% of all cross-regional activity. Japan was the most active Asian buyer by value, with 69 deals worth a total of US$44bn, sparked in part by negative interest rates and strong corporate balance sheets. China is on pace for a record year in outbound M&A deal value and volume. Through the first nine months of 2016 the total outbound deal value was US$165bn, an increase of 129% year-over-year, and total outbound deal volume was 290, an increase of 27% year-over-year.
Cross-regional deals with South African buyers reached their second largest value since the Baker McKenzie Cross-Border M&A Index began, hitting US$4.8bn.
Chemicals and materials, energy and utilities, and technology were the drivers of high value M&A, with deal totals of US$77bn, US$73bn and US$60bn respectively.
A Focus on Luxury
The luxury goods market has been a diamond in the rough for M&A in 2016. With an M&A market that is failing to live up to its blockbuster standards of the past two years, luxury cross-border deals have seen a 53% rise in volume in the first nine months of 2016 compared with the same period in 2015. Despite a 21% drop in value year-over-year, the sector is up 27% compared with the first nine months of 2014.
"The top 5% of the luxury market was not as materially affected by the economic downturn as the rest of the industry," said Marc Levey, Co-Chair of Baker McKenzie's Luxury & Fashion Industry Group. "And there is a major drive among those big luxury companies to build up or round out their portfolios."
In 2016, over half of all deals targeted EU-based companies and the most targeted countries by volume were the UK, US and Italy. The most targeted country by value was Germany, with three deals worth US$3.3bn.
Spotlight on Warranty and Indemnity Insurance
The use of warranty and indemnity (W&I) insurance has continued to increase its presence in M&A deals around the world. Initially prevalent in certain domestic markets, such as the UK, US and Australia, it is now seen in a growing number of jurisdictions including Central Europe and Southeast Asia.
"In our experience, warranty and indemnity insurance helps buyers and sellers allocate risk in a way that is commercially acceptable to both parties," said DeFranco. "Even in jurisdictions that have long been accustomed to warranty and indemnity insurance, we've seen a noticeable surge of interest in its use over the past 12-18 months."
The increased usage of W&I insurance is a result of decreased premiums, an increase in principal and adviser experience and an increase in successful claims.