Angus Grierson, Managing Director, LGB Corporate Finance
It has been a busy start to 2018 for global M&A following very few big-ticket takeovers in 2017. The $1.2 trillion of deals completed in the first quarter marked the most active start to a year since the turn of the century, according to data from Dealogic. The market is characterised by increasing use of debt in private equity-driven M&A, corporate borrowing fueling takeovers and surging valuations. All this is causing some to call the top of the market.
Corporates loading up on debt to undertake acquisitions are led by semiconductor giant Broadcom, which lined up $106 billion of debt financing in February to acquire Qualcomm, before the transaction was unexpectedly cancelled by President Trump. Among the mega deals which have also been confirmed in recent months are AXA’s $15.3 billion offer for Bermuda-based XL Group – its largest ever acquisition, as well as the largest purchase of a US insurer by a European buyer; and a $15.8bn bid by Unibail-Rodamco, the world’s largest landlord, for Australia’s Westfield Corp –the biggest property acquisition since 2013. Unibail-Rodamco took out a Euro 6 billion bridging loan to part fund the bid.
Among PE deals, Blackstone struck its biggest since the financial crisis when it announced in January that it was purchasing a $20 billion stake in Thomson Reuters’ financial and risk unit – financed by a $14 billion package of leveraged loans and high-yield bonds.
Easy and low cost financing has been partly attributable to the increasing valuations in private company deals. In his latest annual letter to Berkshire Hathaway shareholders, Warren Buffet said that cheap debt was fueling a “purchasing frenzy” of M&A activity. Buffet observed that prices seem “almost irrelevant to an army of optimistic purchasers.”
With interest rates and bond yields rising as central banks retreat from a decade of monetary easing, there are concerns that the rising cost of debt may cause the global M&A market to overheat. At first glance, this might appear plausible.
However, compared to previous credit cycles, increases in valuations have been more gradual, with mega deals still only making up a minority of global M&A deal flow and regulations such as the forthcoming Basel IIl measures are being put in place to restrain the rise of leverage loan multiples.
What is more likely is that the rising rate and yield environment will help to take the froth out of the market, moderate leverage on deals, inject a dose of reality into valuations and ultimately lead to a more sustainable flow of M&A.
Regulators are also setting their sights on reigning in excessively leveraged transactions. The Basel III rules, which are set to come into force in March 2019, raise the cost of capital for banks and reduce the profitability of leveraged lending. The ECB also released its final Guidance on Leveraged Transactions late last year, which aims primarily to monitor “credit quality and exposure to leveraged transactions”.
Part of the strategic imperatives of M&A remaining strong are moves into new markets and adoption of new tech, which drive expansion in what has been a benign, low growth environment. A further, promising fundamental sign underpinning M&A activity is the strengthening global economy. The IMF recently revised global growth forecasts for 2018 and 2019 upwards by 0.2 percentage points to 3.9 per cent.Other forecasts suggest that three quarters of major economies are expected to generate more than 2 per cent GDP growth this year – compared to less than 60 per cent in 2011. The M&A party is likely to continue, perhaps in a more subdued form, for the rest of this year.