M&A Deals: Fundamentals For A Robust Market Clearly In Position

M&A are increasingly growing in EuropeThe M&A market today is driven by investment funds, which account for more than half of all transactions

In 2017, the global aggregate value of M&A deals amounted to $3.66tr, predicted to increase to $4.4tr in 2018.

This year, in the US alone, the first six months of the year registered a balance $2.5Tr, up 40% on 2017, with megadeals in excess of $10bn constituting some 38% of the total. Cross border activity was double the 2017 figure, recording a dollar value of 1 trillion, the second-highest level on record. This comes amid significant Chinese interest which has already been blocked by the Trump administration on grounds of national security.

At the close of the third quarter, this figure will have topped $3.25tr, now forecast to reach $5tr by the close of the year, and ultimately beating the previous highest value on record, set back in 2015.

Lower interest rates, tax cuts and a buoyant stock market urge corporate giants to take advantage of the current economic scenario, by either gaining a larger market share or to diversify in to new industries while the going is good.

The emergence of global private equity backed-capital has proliferated, up over 40% in the first six months of 2018, to $204bn. A similar growth rate was registered in the US with the figure reaching $107bn, while a figure of $45.1bn was observed in the Asia Pacific region, recording the greatest impact on record.

European M&A activity totalled $767bn in the first six months of 2018, rising by 96% year-on-year, against the 18% slide in the number of completed deals over the same period. This comes, in spite of the political uncertainty and the looming Brexit. In 2018, t he market has seen a fall in the number of completed deals yet the total aggregate value has risen.

In Spain, with foreign inflows almost double the outlay a year ago, and constituting some 80% of the total investment, the Spanish M&A market continues to expand on the established rising trend, now reaching back several years, largely prompted by key legislation which provided a structural framework coherent with the strengthening post-crisis economic climate. Here, private equity ventures constitute almost 20% on investment.

Total aggregate value of the sector reached almost €70bn in the first half of 2018 clearly indicating a 159% rise on the same period last year. However, the number of recorded deals fell from 650 in 2017, to 555 over the same period. A common trend, globally.

Investment inflows account for almost four times as much as domestic interest, with German and US capital topping the list. Foreign interest has been captivated not only by the adoption of long-sighted tangible measures during the crisis years, but also by ​ the higher liquidity levels spurred by easier funding within the favourable economic panorama.

The Spanish real estate sector has captured most of the attention, unsurprisingly, with loan portfolios (both performing and non-performing asset classes) centering attention, since political stability was restored at the end of 2016.

Chinese investors find Spain attractive on the grounds of greater deployment of new infrastructure at an international level. Notably, last year’s acquisition of the Spanish company Mediapro, owner of the television rights of Spanish football, by Chinese investment fund China Orient Hontai Capital, sold around the world. Spain represents a gateway with an established infrastructure, seen by Chinese investors as an easy access to the Latin American market.

Fundamentals for a robust M&A market are clearly in position, yet underlying risks including potential trade wars and political uncertainty in the longer term could hinder the rising trend, particularly as a rebound in interest rates is on the horizon, in the wake of European Central Bank signaling for a reverse in quantitative easing, commencing in 2019.

About the Author

Chandra Roy
Educated at the LSE, Chandra joined Lehman Brothers where he initially traded commodity options, specialising in risk management through OTC & listed derivatives. His career spans over 25 years in international financial markets having held positions in fixed income & money markets, in both London & Madrid. He worked almost 18 years at Grupo CIMD, where he set up and managed the Emerging Markets & Credit division. He currently lectures in International Financial Markets at the Instituto de Estudios Bursátiles, Madrid.