Global mergers and acquisitions (M&A) had a mixed first quarter with a slide in the number of deals announced but a rise in the overall value of dealmaking activity, according to a report from Mergermarket released Tuesday.
While the total number of deals announced fell by 17.9 percent versus the first quarter of 2016, overall deal value was up by 8.9 percent to a total of $678.5 billion. This dynamic fed through to lift average deal value to $403.4 million.
The move towards larger deals reflects a reversion back towards trends seen in 2015 – often referred to as the "year of the megadeal" – after a 2016 characterized by more of a focus on midmarket activity.
Key themes in evidence for the quarter were the spike in dealmaking in the consumer sector, an enormous scaling back of activity from Chinese buyers and a drop-off of inbound European M&A.
The consumer sector recorded a whopping $136.1 billion of deal value spread over just under 400 deals and including three megadeals (valued at $10 billion or above). The figure would have been substantially higher still had Kraft-Heinz's aborted $155 billion hostile bid for Unilever - which was withdrawn after only two days in the face of substantial opposition - proceeded.
Enthusiasm for pairing up within the sector is largely owing to a search for revenue growth, Cedric Besnard, consumer equity analyst at Citi, told CNBC via email on Tuesday.
"The erosion in barriers to entry and the slowdown in emerging markets is forcing struggling multinationals into finding new avenues of growth….M&A is actually the quickest route - sometimes easier than innovation and less risky than extreme cost cutting," Besnard observed.
A clampdown by the Chinese state regarding capital outflows in general and the acquisition of foreign targets specifically had a severely dampening effect with outbound purchases by Chinese buyers dropping by a tremendous 86 percent (by value) compared to the same quarter last year.
Warnings from state regulators about the dangers and downsides of foreign buyouts have gathered pace over the past year.
"Overseas mergers and acquisitions can sometimes resemble a rose with thorns, you must be careful and you must do your due diligence," Pan Gongsheng, the head of the State Administration of Foreign Exchange (SAFE) and a vice governor of the People's Bank of China (PBOC), told Shanghai Securities News in March, according to news agency Reuters.
This, in conjunction with increased scrutiny of Chinese buyers by regulators and politicians in target markets - due firstly to a high proportion of such deals being cancelled and secondly to increased political sensitivities – has prompted the steep scaling back of activity, both recently, and likely in the months ahead.
Cross-border M&A deals featuring European targets fell 39 percent for the quarter, partly due to the impact of China's caution but also due to buyers from elsewhere in the world staring down the barrel of Brexit and continent-wide election uncertainty and opting to take a more restrained approach. The exception to this was in the U.S. where buyers of European targets hit a first quarter peak unseen since 2008.
One quarter down, three to go and the outlook for the rest of 2017 remains favorable despite significant political headwinds, according to Katharine Dennys, EMEA research editor at Mergermarket.
"High liquidity, access to cheap financing, healthy balance sheets and a need to demonstrate growth to shareholders via M&A all provide a positive outlook for 2017. Technology will drive M&A activity, with disruptive industries such as artificial Intelligence, fintech and the internet of things continuing to attract investor attention," Dennys posited.
Looking at the effect of politics on forward activity, Dennys noted that the jury is still out with regards to President Donald Trump's potential influence.
"Despite Trump's campaign promise to block anti-competitive deals, such as the US$ 105.0bn AT&T/ Time Warner deal, his attitude once in office suggests a more lenient approach towards such high profile deals," the Mergermarket researcher noted, before turning to consider the role of Chinese policymakers, given their new scrutiny of foreign acquisitions valued at more than $2 billion.
"It is likely that China's outbound acquisition spree will become more muted in 2017," Dennys affirmed.