The year of 2017 witnessed a worldwide slowdown in the number of megadeals1. According to a recent Mergermarket Report (the Report), the global total for the number of deals worth US$4 billion or more decreased from a peak of 158 in 2015 and 133 in 2016 to 129 in 2017. In Canada, the number of deals valued CAD$500 million or more decreased from 74 in 2016 to 55 in 2017, as reported by Duff & Phelps. However, there have been recent hints suggesting that the spring for megadeals is just around the corner.
After polling the leading experts in the M&A field, the Report characterized the survey results (the Survey) in one phrase: "megadeals are coming back". In fact, 25 M&A deals valued at US$4 billion or more have already taken place in January and February of 2018 globally, sounding a strong start to the year for megadeals more generally. Aside from deal numbers, the Report also reveals other expectations for megadeals in 2018, which will be discussed in below together with the Canadian dimension of these expectations.
The continuation of the cross-border trend
In the last five years, the percentage of megadeals that were cross-border has consistently stayed in the range of between 42% to 52%, according to the Report. In the Survey, 64% of the respondents expect the trend to continue in 2018, predicting that 40-60% of these deals will be international.
This expectation is popular among Canadian investors as well, as Geoff Barsky, head of Canadian and international M&A at BMO Nesbitt Burns Inc., commented in a recent Globe and Mail article. As pointed out by Peter Buzzi, co-head of M&A at RBC Dominion Securities Inc., firms that have made multibillion dollar deals in 2016 or earlier – namely, Enbridge Inc. and TransCanada Corp. – are still swallowing those acquisitions, which may have contributed to the slower pace of cross-border megadeals in 2017. However, with the development of two to three year integration plans, some big players could now rejoin the negotiating table.
More Private-Equity (PE) backed megadeals
The Report suggested that one contributor to the expected return of megadeals was the revival of PE-backed transactions. In 2017 alone, 26 of the 129 deals valued at US$4 billion or more involved PE funds or PE-backed companies. According to the Survey, the respondents expect PE megadeals to happen more frequently in the next 12 months, with 75% of the respondents predicting an increase of 5-10 in the number of PE-backed megadeals from that in 2017.
Another accelerator in the increase of PE-backed megadeals is the record fundraising level achieved in the PE industry in 2017, with US$453 billion raised globally according to the Report. As a result, some PE firms have huge pools of capital that needs to be deployed and they can complete megadeals rather easily, which has been observed in Canadian pension funds and PE firms as well.
Challenges for megadeals
Despite the expected increase in the number of megadeals, barriers that prevent megadeals from happening still need to be addressed in order to bring the expectation to fruition. According to the Survey, the two issues considered by the respondents to be the biggest challenges for megadeals are excessively high valuations demanded by the target and resistance from target shareholders, which are usually intertwined. Another threat to megadeals is from antitrust risk, as evidenced in the M&A between AT&T and Time Warner valued at US$105 billion. This deal was announced back in October 2016, and is still pending regulatory approval.
Footnote
1 Please note that different articles may have different thresholds for megadeals. The thresholds will be indicated when the specific article is mentioned.
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