US Seen as Safe Haven For Cross-Border Deals in Q1 as EU Cross Regional M&A Crashes
Political turbulence and economic uncertainty are becoming the new normal for dealmakers, however, the impact on M&A activity has not been as steep as many expected, according to Baker McKenzie's Cross-Border M&A Index.
Buyers announced 1,238 cross-border deals worth US$331.2 billion, a 23% decrease in volume and a 16% decrease in value compared to Q4 2016. While the US continues to be impacted by uncertainty around the new administration's policies, inbound deals into North America, lead by the US, accounted for more than a fifth of cross-border deal volume and nearly half of cross-border deal value in Q1 2017. Baker McKenzie's Cross-Border M&A Index, which tracks quarterly deal activity using a baseline score of 100, decreased to 218 for Q1 2017, down 17% from the prior quarter and 9% from Q1 2016. In Q1 2017, cross-border M&A made up 35% and 49% of all deal volume and value, respectively.
"There were several bright spots in the first quarter despite political issues and economic uncertainty providing a shaky foundation for M&A activity," said Michael DeFranco, global head of M&A at Baker McKenzie. "The consumer, energy and utilities, and pharmaceutical sectors all performed well and as political and economic uncertainty wane, we believe M&A activity will pick up as we move through 2017."
The increase in North American inbound activity stemmed largely from EU corporates who spent US$98.1 billion on 118 deals including two of the top four deals of the quarter, British American Tobacco Plc's acquisition of the remaining stake in Reynolds American for US$60.7 billion and Reckitt Benckiser Group Plc's acquisition of Mead Johnson & Company for US$17.8 billion.
Regions and Sectors
North America was a safe haven for deals in Q1 2017 with 277 deals valued at US$147.9 billion, driven by inbound investment from the EU. The US accounted for 94% of inbound deal value in the region. The biggest North American inbound deal, and biggest deal of the quarter, was UK-based British American Tobacco Plc's acquisition of the remaining stake in US tobacco company Reynolds American for US$60.7 billion. The consumer sector was the largest driver of deals with 26 transactions valued at US$82 billion.
The fallout from Brexit, economic uncertainty in southern states such as Spain and Italy, and a series of contentious election campaigns hit EU inbound M&A activity in Q1 2017, as EU targets accounted for only 17% of cross regional deal value, compared to an average of 35% since 2009. Nearly a quarter of the US$41.6 billion invested in the region was from two private equity megadeals, including Blackstone Group LP's US$4.3 billion acquisition of Aon plc’s benefits outsourcing business.
China's absence from the negotiating table led to Japan taking the lead on outbound M&A deal value from the Asia Pacific region, with 63 deals worth US$14.7 billion. Japan's outbound deals were spread across a number of sectors including financial services, telecommunications, and industrials, however, the largest deal came from the pharmaceutical sector, Taketa Pharmaceutical's US$4.9 billion acquisition of US biotech company Ariad.
The consumer sector lead the way for deal value in Q1 2017 with 142 deals valued at US$113.3 billion, while the technology sector lead deal volume with 182 deals valued at US$14.9 billion. Energy and utilities, and pharma were the second and third highest sectors in terms of value, contributing US$51.4 billion and US$49.1 billion respectively.
A Focus on Industrials
In 2016, there were 942 cross-border deals in the industrials sector, an increase of 23 on 2015 and a post-crisis record. Value also hit a post-crisis high of US$116.8 billion in 2016, a 48% increase over 2015.
This year industrials are off to a solid start as the second most targeted industry, after technology, with a total volume of 171 deals and a total deal value of US$16.8 billion. The deal market is expected to continue thriving in 2017 with four specific trends underpinning M&A in the sector – disruption and technological innovation; core competencies and divestments; aftersales services; and defense spending.
“We believed 2017 would slow down after a strong 2016 but it hasn’t been that way," said Stéphane Davin, EMEA head of M&A at Baker McKenzie. "We are in a new world where volatility is just a given that industrials work around. The new US administration and Brexit have not stifled deal-making and the forthcoming elections [in France and Germany] have not created a blockage – they have created an acceleration. Everyone wants to make decisions prior to the elections.”
Spotlight on Compliance Risks
Guidance from the US Department of Justice and Securities and Exchange Commission make the priorities of US enforcement authorities clear, when it comes to compliance risks in M&A transactions.
- Due Diligence: How M&A due diligence was conducted and whether misconduct or misconduct risks were adequately identified
- Effectiveness: How effectively the compliance function has been integrated into the acquisition process
- Post-Acquisition Integration: The company's process for tracking and remediating misconduct risks identified during the due diligence process
Acquirers are at risk of being held responsible for the historical criminal or civil misconduct of the target company. Due diligence alone may not provide full protection from successor liability, but it will mitigate the risk. No acquirer expects to have compliance problems in its own business or in acquired businesses, but it is necessary to analyse the risk profile of target companies based on the type of business model, industry, geographic location, and governmental touch points.
For more information on Baker McKenzie's Cross-Border M&A Index, please see: http://crossbordermaindex.bakermckenzie.com/.