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Financial Services
Healthcare at heart of robust M&A year
From the Financial Times of Mon, 22 Dec 2014 18:07:32 GMT
Dr. Keith A. Marcus draws Allergan Inc. Botox into a syringe before administering it to a patient at the offices of Marcus Facial Plastic Surgery in Redondo Beach, California, U.S., on Tuesday, April 22, 2014. Valeant Pharmaceuticals International Inc. offered to buy Allergan Inc., maker of the Botox wrinkle treatment, in a cash-and-stock deal valued at $45.7 billion in the latest step of the Canadian company's plan to become one of the world's largest drugmakers. Photographer: Patrick T. Fallon/Bloomberg *** Local Caption *** Keith A. Marcus©Bloomberg

Market wisdom has it that most takeovers destroy value in the long-run. But the world’s largest companies seem to have had little time for history lessons in 2014. In all, there were 96 deals worth more than $5bn completed over the past 12 months. Together, their value was around $1.2tn, or 37 per cent of the overall volume of corporate transactions.

In what soon became the best year for dealmaking since the financial crisis – measured on a total volume of $3.34tn – the US led the way, spurred by favourable economic conditions and central bank monetary policy. But Europe and Asia finished the year strongly as well.

Dealmaking zeal can also be gauged by the transactions that failed. So-called withdrawn mergers and acquisitions totalled $662bn — up from $285bn last year — in a sign of increased ambition on the part of acquirers.

Healthcare, in particular, was a sector of intense activity in terms of deals done and attempted — until the US Treasury took steps in September to curb tax inversions, whereby US companies acquire foreign companies and their favourable tax domiciles.

Tax inversions proved one of the year’s most controversial deal drivers. US government action to stop the practice ultimately scuppered the biggest agreed healthcare deal in spectacular fashion: US pharmaceutical company AbbVie dropped its planned $54bn tie-up with the UK’s Shire. That failed deal slowed the momentum behind inversion attempts. Medtronic’s $42bn acquisition of Covidien remains the largest of the tax inversions completed in 2014.

Dealmakers reflect on year
 Natalie Blyth
 Scott Simpson
 John Waldron
 Kenneth Jacobs

“A lot of healthcare announced M&A value was inversion driven but the actual number of completed deals was far less, as a couple of the major deals did not get done,” says Stefan Jentzsch, partner at Perella Weinberg Partners. “It is hard to predict whether healthcare is going to have as big a year in 2015.”

Investors, meanwhile, challenged the principle that deals destroyed value. In many cases, acquirers’ share prices soared when deals were announced. Shareholders appear to have grown weary of share buybacks and chose to reward companies using cheap financing to make acquisitions.

But big was not always beautiful. Rising equity markets emboldened activist shareholders and corporate raiders. Many companies were forced to pre-empt or respond to pressure applied by demanding investors.

Hewlett-Packard and eBay, two large technology businesses that had lost their edge in recent years, both revealed plans to break up in a matter of a few October days. Global miners BHP Billiton and Vale unveiled plans to spin off assets. Germany’s Eon, one of Europe’s largest electricity companies, also said it would it split into two. “We have seen a marked change in tone during the past few months,” says Colm Donlon, co-head of M&A for Europe, Middle East and Africa at Morgan Stanley. “Our clients are now very focused on portfolio clarity, only wanting to own or keep the best assets, and in moving ahead on larger strategic transactions that had previously been sidelined.”

Activists such as Carl Icahn, Dan Loeb and Nelson Peltz persist. Bill Ackman’s Pershing Square even listed a public vehicle in Europe to give his funds greater longevity. But attempts to transfer confrontational, US-style activism to Europe have not met with success.

Tim Emmerson, partner at Sullivan & Cromwell, puts it down to UK and EU disclosure and insider dealing laws, and the passive culture of European shareholders. “We will definitely see US specialists continue to put effort into it, but the big question of 2015 will be who manages to make it work,” he says.

Consolidation remained a core theme. Holcim and Lafarge, two European cement heavyweights, combined to form a powerhouse. Cigarette makers Lorillard and Reynolds, in which British American Tobacco owns a significant minority stake, struck a complicated four-party deal that also involved Imperial Tobacco. US cable giants Comcast and Time Warner Cable, which had been pursued by rival Charter Communications, tied the knot. Charter walked away with some of the deal’s disposals.

However, the complexities involved in executing these sorts of deals should not be underestimated, bankers warn. Comcast is still fighting for clearance from regulators. “One takeaway from this year is that very large, industry transforming deals are more complex and take a longer time to execute than is appreciated, so expectations of further consolidations in parts of the consumer space are overstated,” says Alejandro Vicente, head of Emea consumer investment banking at JPMorgan Chase.

Some European companies, particularly German groups, sought growth by snapping up US rivals this year. Merck, Siemens and ZF Friedrichshafen found US partners in three deals with values greater than $10bn. But Europe’s economic problems were not such that US companies avoided the region: General Electric acquired France’s industrial national champion Alstom.

“Europe has such a large profit pool that, even with weaker economies, the cash flow from the region’s businesses are still stable,” argues Roland Phillips, partner at Centerview Partners. He expects similar interest in 2015.

Among the M&A advisers, Goldman Sachs ranked first in both volumes and fees. Boutique investment banks such as Centerview Partners, Lazard, Evercore and London-based Robey Warshaw made outsized splashes.

Yoel Zaoui, a former senior Goldman Sachs dealmaker who runs London-based Zaoui & Co with his brother Michael, says boutiques differ in size and focus. “The key is the quality, experience, drive and reputation of the senior people driving them. In that respect, you can have a small business in size that is a very relevant business in the industry.”

My year in M&A: top dealmakers reflect

Natalie Blyth
Co-head of Global Banking, UK, HSBC

Most interesting feature of M&A: “Government and regulatory hurdles are increasingly critical factors . . .  from the policies of the US when it comes to tax inversions and the European Union on approvals for big deals.”

What to watch for in 2015: “The telecoms industry will look to consolidate further, while low commodity prices will put pressure on the oil and mining sectors.”

Scott Simpson
Partner and co-head of global transactions, Skadden Arps

Scott Simpson, partner at the London office of Skadden, Arps, Slate, Meagher & Flom.

Photograph by Felix Clay.

Most interesting feature of M&A: “It proved to be resilient in the face of some economic uncertainty and a number of significant geopolitical crises.”

What to watch for in 2015: “M&A is likely to remain strong as corporate players have strong balance sheets, private equity is well funded and regulatory convergence facilitates the use of paper . . . expect M&A activity to be varied and diverse.”

John Waldron
Co-head of investment banking, Goldman Sachs

Most interesting feature of M&A: “Increasing confidence and a more offensive mindset among CEOs and in boardrooms supplemented by broad positive market reaction to strategic transactions.”

What to watch for in 2015: “We expect a continued positive trajectory in 2015 with a healthy dose of activism complementing the natural forces driving consolidation.”

Kenneth Jacobs
Chairman and chief executive, Lazard

Most interesting feature of M&A: “Improved sentiment among decision makers led to transformational transactions across a range of industries, which significantly altered the strategic landscape globally.”

What to watch for in 2015: “Companies will need to address the new competitive dynamics to consolidate or strengthen their market positions.”

Private equity deals on rise but remain below pre-crisis peak

Global private equity-backed deals accounted for $270bn of the M&A activity in 2014 – an increase of 8 per cent on the previous year but still well below the level seen before the financial crisis in 2007, writes Henny Sender in New York.

In many cases, a soaring stock market widened the gulf between how much companies thought they were worth and the sums private equity firms were willing to offer.

However, with the stock market expected to rise more modestly next year, private equity’s one-time masters of the universe think their time has come once more.

“The share price appreciation was so rapid that it was hard to pin down the right valuation,” says the head of capital markets at one major private equity firm in New York. “Companies didn’t feel safe selling. With more stability, it will be easier to agree on terms.”

One sign of hope for private equity dealmaking next year came in mid-December, when BC Partners won a hotly contested auction for pet food company Petsmart, paying $8.7bn in the largest leveraged buyout of 2014. Dealmakers suggest it was reminiscent of “classic” buyouts, as it involved a business producing steady cash flows, which will generally be easier to lever up with borrowing.

However, the big banks active in debt capital markets, including JPMorgan Chase, and Bank of America Merrill Lynch, did not take part in the financing for any of the auction bidders. “Tons of banks fell away,” says one banker involved in the transaction.

Competition for new deals is expected to be more intense next year, as private equity investors seek uses for their cash. In 2014, they took advantage of favourable debt and stock market conditions to list companies, sell down stakes, and borrow at low rates to pay themselves generous dividends. In doing so, they returned over $500bn to their investors.

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