The Urge to Merge

There have been a three large deals announced recently that provide a timely opportunity to review the trend in merger and acquisitions.  The $130 bln Verizon/Vodafone deal, the $7.2 bln purchase of Molex by Koch Industries, and the $6 bln acquisition of Neiman Marcus clearly help lift the dollar value of transactions this year. 

According to Thompson Reuters data, through September 9, M&A activity in the US is up nearly 50% from the same year ago period to stand at $755 bln.    US activity accounts for nearly half (47.2%) of the global mergers and acquisitions thus far this year.   Excluding the US, global M&A activity is off by a fifth this year.

Germany and France have seen a mild increase in domestic M&A, while the UK has seen a nearly 40% decline (to $60 bln).  In the emerging market space, Thomson Reuters data shows domestic M&A activity in China has increased 22% to $122 bln.  Domestic M&A activity in Brazil is off 60% to $26.8 bln,while it is off by a third to $13.2 bln. 

Private equity deals have also increased.  Data from Linklaters, show that the value of private equity deals increased by nearly 30% to $171 bln in H1 2013 compared with H1 2012.  

Merger and acquisition activity has been concentrated in five sectors:  real estate, health care, telecom, energy and consumer products.  Linklaters analysis of the top 20 M&A deals in H1 found that shares prices of targeted companies rose 11% in one month following the announcements as opposed to falling 1% in the H1 2012. 

Cross border M&A activity had been off this year, but the Verizon/Vodafone deal appears to have brought it back to last year's pace.  European companies have been slower than many anticipated in carving out non-core assets, but reports suggest this is likely to pick up.  Separately, in H1 European companies acquired $13 bln of assets in the BRICS and Turkey.  Of note, in H1, US, Canada and Japanese companies accounted for 70% of the foreign acquisitions (by value) of European companies.  

Chinese companies were also active, acquiring about $2.7 bln of European corporate assets in H1.  The "going global" push by Chinese companies, especially state-owned enterprises.  In H1, Chinese companies bought $11 bln worth of US corporate assets and $5 bln of Australian assets ( a nearly 10-fold increase from H1 12). 

Japanese companies are also stepping up their foreign acquisitions, with record amounts in 2011 and 2012.  Although this year was off to a slow start, there are signs of increased activity.  Attractive financing has become available and government-sponsored agencies are also providing equity. 

There seems to be several drivers of the M&A activity.  Thomson Reuters figures indicate that globally, businesses have some $6.7 trillion of cash.  As we have noted previously, corporations' large cash holdings have to be parked some place.  And often, where it is parked leverages it and this is  an under-appreciated source of hot money sloshing around the globe, contributing to the creation of various financial products and the instability that emanates from the financial sector. 

In addition to the cash-rich balance sheets, the fact that economic activity appears to be picking up and interest rates are low, but rising, may also be encouraging M&A activity.  Horizontal acquisitions are also a way to rationalize industries with excess capacity.  Acquisitions by Japan and China are part of a (new) globalization push. 

The foreign exchange market impact of cross border transactions is far from clear or obvious.  First, not all transactions are for cash.  Second, even when it is for cash, corporations often borrow the funds onshore rather than buy the currency.  This way they acquire a liability in that currency that "hedges" the currency component of the asset they are purchasing.  Third, depending on the particular currency pair involved, even if it is a cash transaction and the currency is going to be bought (rather than borrowed), it may be overwhelmed by other foreign exchange flows.