Top 5 sectors for M&A in 2015

1. FINANCIAL SERVICES

Con­sol­i­da­tion is a buzz­word that pep­pers most con­ver­sa­tions about the future growth and long-term strat­e­gy of the glob­al finan­cial ser­vices sec­tor.

A volatile glob­al macro-eco­nom­ic sit­u­a­tion and an ever­more com­plex reg­u­la­to­ry envi­ron­ment in most juris­dic­tions means many com­pa­nies, from wealth man­age­ment groups to asset man­agers and non-bank lenders, are con­stant­ly search­ing for scale and growth.

Yet, despite this struc­tur­al shift, the aggre­gate val­ue of finan­cial ser­vices merg­ers and acqui­si­tions (M&A) only reached £215 bil­lion this year, accord­ing to Zephyr. This is some way off the £337-bil­lion peak in 2007, mean­ing there could be more deals to come.

Accord­ing to Michael Frieser, Europe, Mid­dle East and Africa (EMEA) head of finan­cial insti­tu­tions, cor­po­rate and invest­ment bank­ing at Bank of Amer­i­ca Mer­rill Lynch, there have been very few strate­gic expan­sion-led deals this year.

“Most of the trans­ac­tions have been about banks… dis­pos­ing of non-strate­gic parts of their busi­ness,” he says. “Nobody in Europe has large-scale M&A at the core of their strate­gic agen­da at the moment. Banks are by and large focus­ing on the reg­u­la­to­ry impact, the fin­tech chal­lenge, build­ing their cap­i­tal base and in some instances drop­ping mar­ket posi­tions that are unsus­tain­able.”

Anoth­er senior US invest­ment banker says many finan­cial ser­vices groups, par­tic­u­lar­ly in Europe, are keep­ing their pow­der dry and wait­ing for a more pre­dictable reg­u­la­to­ry envi­ron­ment and says if there is “enough sup­port to do trans­ac­tions” then there could be “a last round of con­sol­i­da­tion in Europe in the next cou­ple of years”.

David Lom­er, J.P. Morgan’s co-head of M&A for Europe, the Mid­dle East and Africa says that in this sec­tor as in oth­ers, M&A is like a “coiled spring” adding: “You can go through peri­ods of rel­a­tive inac­tiv­i­ty, but where there is under­ly­ing strate­gic log­ic the ten­sion will invari­ably be released.”

2. PHARMACEUTICALS

There is no oth­er sec­tor that has cap­tured the head­lines for mega-deal M&A as much as phar­ma­ceu­ti­cals this year. From the Unit­ed States to Europe and Asia, the mak­ers of drugs and com­pounds have been scour­ing the globe for deals in a cease­less hunt for the next block­buster med­i­cine.

It is an “arms race” dri­ven by phar­ma­ceu­ti­cal com­pa­nies’ grow­ing need for scale, new mar­kets, effi­cien­cy and bumper pipelines of new drugs.

Data from Zephyr shows the val­ue of M&A trans­ac­tions car­ried out in the phar­ma­ceu­ti­cal prod­uct and prepa­ra­tion sec­tor jumped from £58 bil­lion in 2007 to £239 bil­lion in 2015. This reflects a sharp rise of more than 400 per cent and show­cas­es the evo­lu­tion tak­ing place in the sec­tor.

There is no oth­er sec­tor that has cap­tured the head­lines for mega-deal M&A as much as phar­ma­ceu­ti­cals this year

How­ev­er, bankers point out that while there has been a marked an increase in high-val­ue mega-deals, the vol­ume of phar­ma­ceu­ti­cal trans­ac­tions has remained rel­a­tive­ly flat. A point backed up by Zephyr whose data shows that between 2007 and 2015 the vol­ume of phar­ma M&A deals increased from 860 to 919 – a rise of less than 7 per cent.

Many of these mega-deals have been dri­ven by US inver­sion rules, which allow for sig­nif­i­cant tax sav­ings and explain why Pfiz­er, the giant Amer­i­can drug com­pa­ny, struck a $160-bil­lion deal last month to merge with Aller­gan.

Accord­ing to Thom­son Reuters, if the com­bi­na­tion of Pfiz­er and Aller­gan com­pletes, it will not only become the largest phar­ma­ceu­ti­cal deal in his­to­ry, but will rank as the sec­ond largest M&A trans­ac­tion of all time.

Gus­tav Ando, a research direc­tor for IHS Life Sci­ences, says the deal rep­re­sents a “sen­sa­tion­al trans­for­ma­tion of the glob­al phar­ma­ceu­ti­cal indus­try”, adding that the sheer scale of the trans­ac­tion would be like­ly to trig­ger more deals in the sec­tor next year.

3. TELECOMS

Size has always mat­tered in the word of tele­coms, a sec­tor which has long been dri­ven by trans­for­ma­tion­al M&A activ­i­ty. More than $60 bil­lion of acqui­si­tions were car­ried out in the first half of this year alone, with Zephyr record­ing a total val­ue of £231 bil­lion of trans­ac­tions in 2015. This is already dou­ble the total achieved in 2007 when £105 bil­lion-worth of deals were sealed.

Many tele­coms com­pa­nies are also find­ing that join­ing forces makes sense at a time when every­one in the indus­try faces high­ly cap­i­tal-inten­sive demands for invest­ment

Cor­po­rate deal-mak­ing in this sec­tor, in Europe and fur­ther afield, is dri­ven by both the pres­sure to cre­ate economies of scale and the con­ver­gence of ser­vices as con­sumers increas­ing­ly demand inter­play between their fixed line and mobile devices.

Many tele­coms com­pa­nies are also find­ing that join­ing forces makes sense at a time when every­one in the indus­try faces high­ly cap­i­tal-inten­sive demands for invest­ment in tech­nol­o­gy and build­ing net­works. Invest­ment spend­ing is often essen­tial when research and devel­op­ment means new tech­nol­o­gy is con­stant­ly dis­rupt­ing the mar­ket.

Accord­ing to a senior indus­try exec­u­tive, tele­coms com­pa­nies in Europe have only just start­ed to build 4G, but are already hav­ing to dis­cuss plans for 5G. “Size mat­ters, oth­er­wise you can­not make these huge invest­ments,” he says.

More con­sol­i­da­tion is expect­ed, par­tic­u­lar­ly in Europe, but as this is a sec­tor where the risk of harm­ing con­sumers through ill-advised M&A is high, reg­u­la­tors are keep­ing a keen eye on any trans­ac­tions. Reg­u­la­tors are par­tic­u­lar­ly anx­ious to avoid a sit­u­a­tion where strate­gic M&A activ­i­ty could cause prices to rise for con­sumers.

4. COMPUTER MANUFACTURING

The world of com­put­er man­u­fac­tur­ing is big, incor­po­rat­ing every­thing from the cre­ation of PCs and oth­er hard­ware to semi­con­duc­tor chips and elec­tron­ic com­po­nents.

Com­pa­nies that can pro­vide com­plex tech­no­log­i­cal exper­tise, par­tic­u­lar­ly semi­con­duc­tor equip­ment, have been par­tic­u­lar­ly hot com­modi­ties at a time when devel­op­ment costs are ris­ing.

This is why Ava­go Tech­nolo­gies of Sin­ga­pore swooped on rival chip­mak­er Broad­com in a mul­ti-bil­lion-dol­lar deal, which has drawn reg­u­la­to­ry scruti­ny, but will be the largest merg­er of chip­mak­ers in his­to­ry.

Economies of scale as well as the need to diver­si­fy, anoth­er dri­ving force in this sec­tor, is also why Intel, the world’s biggest chip­mak­er and a Sil­i­con Val­ley stal­wart made a $16.7‑billion swoop for Altera.

Intel makes PC chips and sells most of those used in com­put­er servers, while Altera pro­vides the chips used in mobile devices and cars.

Wood­side Cap­i­tal Part­ners, a glob­al inde­pen­dent invest­ment bank, says elec­tron­ic equip­ment, instru­ment and com­po­nents are cur­rent­ly dom­i­nat­ing glob­al M&A activ­i­ty in this sec­tor, with merg­ers involv­ing semi­con­duc­tor man­u­fac­tur­ers not far behind.

There are like­ly to be more deals to come. As Steve Mol­lenkopf, chief exec­u­tive of Qual­comm, which is anoth­er major provider of con­nec­tiv­i­ty chips for smart­phones, says: “I think there’s going to be a tremen­dous amount of growth in com­put­ing and resources ded­i­cat­ed to sup­port­ing the cloud. We look at that as an oppor­tu­ni­ty for a com­pa­ny like ours.”

5. OIL AND GAS

There is per­haps no oth­er sec­tor which is cur­rent­ly fac­ing such dif­fi­cult mar­ket con­di­tions as oil and gas. This is an indus­try which has been thrown into tur­moil by plung­ing oil prices, which are still below a once-unthink­able $50 a bar­rel bench­mark. Gold­man Sachs has even warned that that the oil price could sink to $20 a bar­rel.

Such volatil­i­ty is plac­ing severe cost pres­sures on the indus­try from the explor­ers to the large oil majors, and is lead­ing to struc­tur­al change and strate­gic deal-mak­ing.

Data from Zephyr shows the val­ue of M&A in the oil and gas sec­tor this year hit £134 bil­lion, com­pared with £73 bil­lion in 2007. This year has even pro­duced what Michael Hulme, who runs a Carmi­gnac Ges­tion com­modi­ties fund, dubbed the “big cahu­na” of deals, Shell’s pro­posed £43-bil­lion takeover of BG Group.

The fund man­ag­er says, although he had a nat­ural scep­ti­cism about whether mega-merg­ers of oil com­pa­nies cre­at­ed sig­nif­i­cant syn­er­gies, M&A activ­i­ty was only like­ly to increase. It could take time, how­ev­er. “There is still too much vari­ance [in prices], but if oil prices sta­bilise at $50 to $60, it is much more like­ly that more deals will be struck,” he says.

James Peterkin, EMEA co-head of oil and gas at Bar­clays, agrees and says, while much of the activ­i­ty this year has been focused on asset dis­pos­als, large trans­for­ma­tion­al deals in 2016 could hinge on val­u­a­tions. “A lot of this year has been about adjust­ing to the shock of the oil prices on the screen,” he says. “We think it could stay at around $50 a bar­rel next year before start­ing to pick up there­after. If oil prices stay down for a longer peri­od, then peo­ple may start look­ing at wider options for M&A.”

1. FINANCIAL SERVICES

2. PHARMACEUTICALS