By Geri Westphal
It won’t be like 2015, but current trends show positive robust market conditions for M&A.
Technology M&A had an unprecedented year in 2015 with volume of approximately $591 billion. That’s up 94% from the previous year, according to data from Bank of America Merrill Lynch. This spike in volume is indicative of why M&A and divestitures are among the top-five 2016 priorities for treasurers in The NeuGroup peer group universe. But while M&A remains robust in 2016, it likely won’t match 2015’s growth.
As part of a key session at the recent 2016 Mid-Year Meeting of The NeuGroup’s Tech20 Treasurers’ Peer Group, Bank of America Merrill Lynch’s Chet Bozdog, global co-head of tech, media and telecommunications, along with David King, co-head of technology M&A, and Dave Moran, managing director equity capital markets, shared current M&A statistics and the outlook for the rest of 2016.
The numbers include the fact that 2015 was significant because of “mega” deals that were done with bridge financing and that many companies pre-funded well ahead of closing their acquisitions. This helped to de-risk, reduce or sometimes eliminate the need for a bridge. Jumbo pro-rated transactions also played an important role in acquisition financing strategies, the trio noted, and the European market added incremental capacity while providing added diversification for investment-grade issuers. They also noted that the regulatory environment has had the greatest impact in the PE and LBO space due to heightened focus on leveraged lending.
According to Jeff Rothman, managing director and head of technology, media, and telecom banking at Bank of America Merrill Lynch, the tone remains positive in 2016. “Really large deals are getting done in reaction to this positive sentiment,” Mr. Rothman said, adding that “prefunding and holding on to the flexibility is important for a successful M&A deal and has become a popular choice for the acquiring company.”
Also as part of discussions at Tech20, Mark Mohler, director of treasury at chipmaker Broadcom, explained his company’s $37 billion acquisition of Broadcom by chipmaker Avago, which closed earlier this year. “A deal of this size, similar to the Dell/EMC deal, would require underwritten financing for the board to accept the deal,” Mr. Mohler said. “The Avago acquisition of Broadcom was fully underwritten, meaning at the time the merger agreement was signed, we represented that the company could need as much as $18bn of financing; and we had a group of banks signed up to fund the financing following a best efforts marketing of the debt to the public markets.”
Continued activist engagement. Many shareholder activism strategies continue to support strategic transformation and transactions for their target companies. The level of assets under management for activists has skyrocketed to approximately $170bn, according to news reports, while partially focused activist funds controlabout $173bn for a total of around $342bn. This is a lot of money with a lot of power. M&A is feeling the side effects of the power of activism money, according to Bank of America’s Mr. King. He added that the most recent activist strategies have been more about obtaining board representation and less about the push for return of capital. “The activists are getting smarter,” he said. “The new activist strategies are more of a buy and hold and much less of a quick-hit strategy,” which had been popular.
Headwinds Exist for Remainder of 2016. It would be difficult to match the 94% M&A growth of 2015, and as such, 2016 growth levels have been slower, currently down 25% from last year’s torrid pace. This is due to notable headwinds, which include a decline in premiums and a shadow of doubt that the strength of the debt capital markets will remain. Everyone will continue to watch the Dell-EMC merger closely to see what is possible with financing in current markets.
There are also questions about the 75-plus private US tech companies with $1bn valuations (the so-called unicorns) that will draw market attention. These deals are stratified between those with enough funding in place to carry them to the next level, to those that will require nearer-term liquidity. The latter group will get lower valuations and, if acquired before they can IPO, may deflate some of the M&A statistics for this year.
Lastly, Chinese M&A is causing some headwinds, especially in the semiconductor space, in part due to the Chinese government’s recent drive to substantially increase the percentage of tech components produced by Chinese firms and sold in China by 2020.