Second-quarter M&A close to record amid mega deals

Mergers and acquisitions (M&A) worldwide in the second quarter of 2015 almost matched the record set in the second quarter of 2007, according to preliminary Thomson Reuters data, as big companies turned to deals to boost their market share.

Low interest rates and stronger confidence among chief executives have led to a steady rise in M&A activity in the last two years to close to pre-2008 financial crisis levels. The second quarter of 2015, however, stands out for the number of mega deals that were clinched or attempted.

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These include Royal Dutch Shell's $70 billion acquisition of British rival BG Group, cable operator Charter Communications's $78.7 billion merger with Time Warner Cable, and chip maker Avago Technologies's $37 billion acquisition of peer Broadcom.

Such large deals drove M&A volumes globally in the second quarter of 2015 up by 34.6 percent year-on-year to $1.33 trillion as of June 26, shy of the record $1.41 trillion seen in the second quarter of 2007.

"Given the consolidation that is going on across numerous sectors, to be a bystander could mean losing ground from a competitive standpoint," said Gary Posternack, global head of mergers and acquisitions at Barclays.

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"Companies are mapping out their industry landscapes, focusing on transactions that could position themselves as industry leaders, and acting aggressively to try to bring them to fruition," Posternack added.

Consolidation was often sparked by one company exploring a sale and spurring its rivals into action. In the United States, for example, health insurer Humana's decision to put itself on the block prompted peers Cigna, Aetna, Anthem, and UnitedHealth Group to also explore other deals.

To be sure, there were several takeover approaches in the quarter that were rebuffed. Cigna has so far snubbed Anthem's $53.8 billion acquisition proposal, natural gas pipeline company Williams Companies rejected a $53.1 billion offer from peerEnergy Transfer Equity, and generic drug maker Mylan is resisting a roughly $50 billion bid by Teva Pharmaceutical Industries, while also seeking to acquire rival Perrigo Co. in a hostile $35 billion bid.

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"The public markets have become more receptive to companies taking control of another company in a transformational way, even when the target may be reluctant to sell or merge," said Robin Rankin, global M&A co-head at Credit Suisse.

Strategic deals

A major difference between the recent M&A boom and that seen in 2007 is that the latter was to a large extent fueled by private equity-backed leveraged buyouts, as opposed to this year's strategic corporate deals. In fact, the first half of 2015 has seen the slowest six-month period for private equity-backed acquisitions since 2012.

"For private equity investors, one of the main issues is the limited supply of assets. They have money to put to work but it proves hard for them to compete against industry players or new money pools in fiercely competitive auctions," said Luigi Rizzo, head of M&A for Europe, the Middle East and Africa at Bank of America.

Despite the near-record M&A volumes, and the frothy valuations that have accompanied them, dealmakers say companies that see a strong strategic rationale remain committed to acquisitions.

"When you are in the boardroom, discussion is not generally focused on whether we are in a bubble or not, or how long will this M&A trend continue. The discussion is rather about fundamentals, what is happening to operations and how much is the business worth," said Stephen Arcano, M&A head at law firm Skadden, Arps, Slate, Meagher & Flom.

M&A volumes jumped in all three regions. More companies showed appetite for cross-border dealmaking, with U.S. agrochemicals company Monsanto launching a bid for Switzerland's Syngenta, and Potash Corp of Saskatchewan going after German peer K+S.

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"Buyers are looking for growth and borders do not represent obstacles. If they can buy something in emerging markets, developed Asia or in Europe, that is consistent with their strategy, that will be what they want to do," said Bob Eatroff, Americas M&A co-head at Morgan Stanley.

Macro-economic concerns such as Greece's debt crisis and China's interest rate policies did not dampen M&A sentiment in Europe and Asia in the second quarter. Dealmakers say this could change if concerns over Greece or other issue curb risk taking.

"The market backdrop in Europe could be described as a form of surreal stability; markets are favorable, but there are potential risks on the horizon which may not yet have been factored in," said Robert Leitão, head of Rothschild's global financial advisory team.