A Q&A With Frank Gallagher and Peter Drippé, Portfolio Managers at Visium Funds
Q1: The Treasury Department recently tightened tax rules to deter U.S. companies from moving their corporate headquarters to lower-tax countries. How will these new regulations impact the current level of mergers and acquisition (M&A) activity?
The new Treasury regulations will make it difficult for U.S. companies to engage in M&A transactions with foreign companies primarily to realize tax advantages and repatriate offshore earnings on a tax-exempt basis. Although it will have a negative impact on the level of inversion-oriented M&A activity going forward, pending deals of this nature should close as expected.
Interestingly we have seen more European companies venture into the U.S. seeking to benefit from greater economic growth prospects. We believe that lackluster European economic growth has encouraged buyers from France, Germany and the U.K. to become more active in acquiring U.S. domiciled companies that may benefit from superior growth prospects in the U.S. relative to Europe.
Basic industry and Healthcare are proving to be attractive sectors to these European buyers. In our opinion the U.S. Healthcare industry, in particular, continues to be ripe for consolidation. As global leaders in pharmaceutical research and development, U.S. companies provide significant opportunity for prospective buyers.
Q2: Mega-mergers, deals of more than $20 billion, are at record levels. What is behind the increased M&A activity among larger companies?
We believe the increase in larger deals is a function of favorable conditions for M&A activity. Historically low interest rates and the availability of debt financing have provided an attractive backdrop for deals. Many of these mega-mergers involve industries, such as telecommunications, that have already experienced a wave of consolidations and are now comprised of a fewer number of larger companies. These deals have typically involved one large industry participant acquiring another large industry player to capture substantial business synergies and benefit from expense consolidation once the two companies are merged and integrated.
Q3: Are corporate simplification and shareholder activism themes still fueling M&A activity. What role, if any, does private equity play?
Shareholder activism has continued to drive M&A transactions. Activists have been present in numerous transactions and activists funds have continued to attract substantial investor interest. In fact, capital in dedicated activist funds recently exceeded $100 billion. In addition, several companies have rewarded activist initiatives with proposed or announced corporate simplification transactions.
Private equity has played much less of a role in current M&A activity. While these firms continue to evaluate a host of acquisition prospects, very few deals have come to fruition as a result of their efforts. We believe that current stock prices provide reason to pause, as well as the challenge of competing with strategic buyers who are looking to fuel their core businesses with faster growing prospects.
Q4: What is your outlook for M&A activity in 2015?
We believe that M&A deal volume will continue to grow from today’s impressive levels that project $3.4 trillion of activity in 2014.* While current levels are still below 2007 peak levels of $4 trillion, we believe the $4 trillion level will be topped within the next few years, perhaps as early as 2016.
STOP PRESS: M&A Update For October (from Merrill Datasite)
- Globally, the value of M&A deals in October surpassed aggregate 2013 numbers, a trend apparent throughout 2014. Deal sizes have skyrocketed during the year, given the volume of large-cap and transformative transactions. CEO confidence seems to have been the main driving force boosting these mega transactions.
- Europe saw a total of US$41bn-worth of deals in October and, despite a negative economic outlook at the start of Autumn, the year-to-date value is still 11.2% higher than the whole of 2013 at US$714.1bn.
- Buyouts in North America increased in October 5.9% by value and exits decreased 30.8% by value compared to the same period last year, suggesting apprehension in the market
- Asia-Pacific M&A deals totalled 225 for October, with a combined value of US$28.5bn
- Latin America witnessed only 27 deals, with a value of US$10.3bn. However, average deal size was the highest since Q1 2010 at US$379m