×

Cash-rich corporate buyers squeeze out private equity in 2016's M&A frenzy: PitchBook

Spencer Platt | Getty Images

Corporate buyers paid out a record $1.7trillion during 2016 for U.S. and European mergers and acquisitions (M&A), according to analysis from data providers PitchBook.

The heady amount represented 80 percent of total M&A deal value for the year, as cashed-up strategic buyers pushed bids up to levels so high that it often made it difficult for private finance to compete.

The prominence of industry buyers represented a discernible change from a year earlier, according to Dylan Cox, analyst at PitchBook, in emailed comments to CNBC.

"That's a 7.5% jump from 2015, and the largest amount we've ever recorded. Strategics are winning more deals - oftentimes over private equity firms - due to high public equity valuations and record amounts of cash on corporate balance sheets," he explained.

Looking ahead to the coming year, with cash balances currently sitting at 10-year highs, Cox identified a continuation of the trends.

"We think that this uptick in corporate acquirers' purchasing power will continue to drive up multiples. We also expect to see more "megadeals" - which are deals valued at or above $5 billion," he predicted.

Indeed, 54 percent of deals done in 2016were megadeals, resulting in data which showed year-on-year stability in total transaction value of around $2.1 trillion but a sharp 23 percent drop-off in number of deals done to 18,344.

Burrowing into the numbers, PitchBookanalysts looked at the valuations of publicly-listed S&P 500 companies to estimate the hike in their purchasing power in recent years.

At the end of 2016, the price-to-earnings ratio (P/E) for the aggregate index was around 26.0x, which compares to a post-financial crisis nadir of 13.5x as seen in September 2011.This implies a near doubling on average of companies' spending capacities over the past five years.

Despite concerns raised, particularly within certain sectors such as telecoms and media which President Trump had singled out during his election campaign with threats to block mega deals, Cox is sanguine about the potential impact of policymakers.

"We think that political uncertainty plays a minimal role in M&A dealmaking. These transactions happen on a deal-by-deal basis and are generally unaffected by the outcome of political events," he contended.

Republican administrations have traditionally proved more permissive of M&A with less challenges to announced deals made on the basis of competition grounds than during the reign of Democratic presidents.

President Trump's pledge to incentivizeU.S. companies to repatriate overseas cash through changes to the tax code could see a further fillip to the spending capabilities of domestic strategic buyers.

On the other side of the coin, as public market valuations head higher and hedge funds fall out of vogue with investors fed up with high fees and mediocre returns, private equity has continued to sweep up new interest and funds, boosting their deployable reserves going forward.

Follow CNBC International on Twitter and Facebook.