Canada: Whither Tech M&A 2016?

According to a recent MergerMarket Group report, the first 11 months of 2015 saw global deal value reach USD $3.88tn, surpassing global deal value for the entirety of 2014. At a glance, it seems the last month of 2015 actually saw an increase in the growth of deal value with the closing of four deals, each valued at over USD $50bn. A major pharmaceutical takeover deal worth a reported USD $183bn served to cap of a year touted by the Wall Street Journal as "the Biggest M&A Year Ever."

By November's end, Technology, Media, & Telecoms (TMT) led all sectors in global deal value with USD $537.4bn in reported deals worldwide. Astoundingly, this grand total doesn't account for deals closed after November, including a significant merger in Canada's telecommunications sector, or the acquisition of a European CRM business by a major consulting firm.

The resurgence of the TMT M&A market, and the start of the new year, have led many experts to put on their forecasting caps and predict whether the recent rise of TMT M&A suggests that, as Barbra Streisand sang, "happy days are here again," or whether, as the Sinatra classic goes, we've "heard this song before."

MergerMarket Group: 2016 outlook

The 2016 Outlook Report published by MergerMarket in concert with R.R. Donnelley VENUE® states that 2015 saw global M&A activity "set a breakneck pace", and highlighted the month of November as the "biggest-ever in deal history." Rather than offering prognostications of their own, the authors of MergerMarket report relied on interviews with, and survey responses from, Banking, VC, and Private Equity Executives and other professionals based on the U.S., Europe, and Asia-Pacific.

The majority of respondents, some 64%, predicted continued high M&A volume in the technology sector in 2016, 60% of all respondents thought Asia Pacific would receive more attention in 2016. The report suggests that as consumers become accustomed to higher standards of technology goods and services, "firms will seek to meet those needs through targeted investments."

Among those respondents who predicted slow growth or stagnation in technology related M&A activity, Europe was often mentioned as an at-risk region. Respondents cited continued debt pressures, unstable political and regulatory systems, rising interest rates, and the crises over Russia and Syria as factors supporting their predictions that Europe would be outpaced by other regions, namely North America and Asia-Pacific.

Deloitte: the Deloitte M&A Index 2016

Deloitte's 2016 M&A Index provides several factors the company predicts will influence global M&A performance in 2016. Chief among these is divergence in monetary policies. According to Deloitte, "in the US, the market is widely expected to have already priced in the gradual increases to the Federal Reserve interest rate." Although Deloitte does not expect "major shocks in the debt market," the company suggests that the increased cost of credit "could lead to a slowdown in the issuance of acquisition related bonds which globally stands at USD $282bn, a 15-year high."

With specific regard to TMT M&A activity, Deloitte suggests that the threat of disruptive innovation will continue to impact "the traditional products and markets of many companies", and that as a result, those companies "are launching venture funds to seek and invest in new sources of innovation, which could lead to smaller, but more strategic deals," as well as, "participation in cross-industry strategic alliances and venture investments."

Although the report does not provide any grand predictions, Deloitte expects that in 2016 financial service companies will continue to launch venture funds to tap into the Fintech sector, alternative lending and crowdfunding platforms will begin to acquire competitors in order to expand into new markets, and Asia-Pacific will continue to be a major player after recording over double (USD $224.3bn) the total TMT M&A deals completed in 2013 (USD $103.3bn).

Fortune: what the 2015 merger boom means for the 2016 stock market

In an article published January 4, 2016, Joshua M. Brown, CEO of Ritholtz Wealth Management, former broker, and columnist for Fortune Magazine's Market Intelligence section asks whether 2015's triumphal M&A year should serve as a "sell" signal to market participants.

Brown points out that by mid-December, "the total value of M&A deals involving U.S. acquirers in 2015 topped $2 trillion for the first time ever," and cites deals such as the proposed Dow Chemical and DuPont's merger as examples. When combined with foreign M&A activity such as Anheuser-Busch InBev's acquisition of SABMiller, Brown states that "global total [M&A activity in 2015] neared $4.7 trillion." However, despite the overwhelming heights reached in 2015, and the fact that "past M&A peaks have tended to occur at the top of stock market cycles, not long before steep downward slides," Brown concludes that "it's premature to declare a market top."

As support for his prediction, Brown offers analysis of the two most recent major corrections in the Tech M&A market. The original .com bubble, Brown states, was epitomized by the AOL-Time Warner merger of 2000, which Brown describes as an "an empire building exercise" in which old-media titans allowed new-media upstarts to take over using little more than elevated stock prices as currency. The inflated value of that deal, Brown concludes, "turned out to be representative of a broader tech bubble, which burst soon thereafter."

The more recent M&A boom of 2006-2007, according to Brown, "was fueled almost entirely by debt." As a result, Brown states, "every company, no matter its size, was both a potential target and a likely acquirer." That trend, too, says Brown, was a symptom of a bubble.

With regard to the current state of the M&A market, Brown's position is that TMT M&A activity is "driven by reluctant pragmatism rather than irrational exuberance," a claim he suggests is evidenced by the fact that "CEOs are entering into marriages of convenience with competitors out of desperation to preserve margins or rationalize costs." Concluding, Brown suggests that although increased M&A activity is likely to occur near the end of a bull market, currently "we're seeing companies pairing off from a position of weakness, not strength, at prices that don't seem euphoric."

Forbes M&A: hot and frothy; 2015/2016 M&A outlook recap

In its comprehensively titled write-up, Forbes M&A describes the current state of the broader M&A market as ""frothy," and predicts that high levels of activity will continue "at least through 2016." With respect to TMT M&A, Forbes' emerging tech specialist, Steve Andriole, plainly states that "record-setting technology M&A – at extremely high valuations" seen during 2015 "reminds [him] of the other valuation bubble".

Andriole predicts that although the current TMT M&A boom will continue through 2016, "valuations will crash by late 2016 – early 2017." Hedging his statement slightly, Andriole suggests that high value M&A activity in specific segments of the TMT sector (particularly digital security and cloud integration services) will likely continue "well into 2017 and 2018."

Andriole utilizes a business technology trends-driven model to derive his predictions. Although he acknowledges that his approach is biased toward and "overvalues subject-matter expertise" above financial metrics. Andriole concludes that "the key to predictability is technology and its market."

The author would like to thank Bert Riviere, articling student, for his assistance in preparing this legal update.

Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global legal practice. We provide the world's pre-eminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members ('the Norton Rose Fulbright members') of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients.

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