Last week's announcement of a proposed transaction in the food and beverage industry for a staggering US $107 billion does not stand alone as a mega-deal in 2015, according to a recent Mergermarket report. The deal is part of what has been a record year for deal valuations. Through the first three quarters of this 2015, there have been a total of six deals worth more than US $50 billion. As a result of these mega-deals, deal value has totalled US $2.7 trillion, up 21% from the first three quarters of last year.
The report lists a number of factors that analysts believe have contributed to this year's record deal valuations:
- Cheap debt. As permitted by low interest rates, cheap debt has raised the ceiling in terms of the price companies are actually able to pay.
- Shareholder pressure. The pressure to generate increasing dividend payouts has pushed management to pursue deals more aggressively.
- Industry-specific factors namely the tech boom and consolidation. Companies are feeling the need, now more than ever, to invest in mobile technology as well as in internet security, or else risk being left behind. In addition, slumping commodity prices and an over-competitive market have pushed players in commodity-based industries, such as the oil and gas industry, to consolidate.
- Slow organic growth. The inability to grow internally has forced companies to look externally in order to remain competitive. Analysts believe this factor to be the biggest contributor to the year's run of high deal valuations.
Analysts remain confident mega-deals will continue for the near future. In spite of record deal valuations, analysts believe we are at least a year or two away from experiencing a valuation bubble burst.
As mega-deals persist, one of the primary legal challenges will be staying onside of anti-trust legislation. Parties to these deals should not expect regulatory approval to come easily and should anticipate delays and increased costs. Failure to minimize the costs and delays associated with anti-trust compliance could spell the end of the mega-deal.
The author would like to thank Michael Viner, articling student, for his assistance in preparing this legal update.
Norton Rose Fulbright Canada LLP
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