United States: 2017 M&A Report

Last Updated: May 5 2017
Article by WilmerHale

REVIEW

In 2016, the number of reported M&A transactions worldwide dipped by 2%, from a record 34,838 deals in 2015 to 34,191, but still represented the secondhighest annual tally since 2000. Worldwide M&A deal value decreased 16%, from $3.64 trillion to $3.06 trillion—a total that was still the third-highest annual figure since 2000, lagging behind only 2015's record tally and 2007's $3.17 trillion result.

The average deal size in 2016 was $89.4 million, 14% below 2015's average of $104.5 million, and just shy of 2014's average of $91.0 million, but 40% above the annual average of $64.0 million for the five-year period preceding 2014.

The number of worldwide billion-dollar transactions decreased 9%, from 540 in 2015 to 489 in 2016. Aggregate worldwide billion-dollar deal value declined 21%, from $2.68 trillion to $2.11 trillion.

Geographic Results

Total deal value decreased across all geographic regions in 2016, with Europe the only region seeing an increase in the number of M&A transactions:

  • United States: Deal volume decreased 9%, from 13,211 transactions in 2015 to 11,968 in 2016. US deal value declined by a similar percentage, from $2.05 trillion to $1.86 trillion. Average deal size inched up from $154.9 million in 2015 to $155.3 million in 2016—the highest average deal size in the United States since 2000. The number of billion-dollar transactions involving US companies decreased by eight, from 286 in 2015 to 278 in 2016, while the total value of these transactions decreased 11%, from $1.65 trillion to $1.47 trillion.
  • Europe: Deal volume in Europe improved in 2016 for the third consecutive year. The number of transactions increased 6%, from 14,652 in 2015 to 15,489 in 2016—the European market's high point since 2000. Total deal value decreased 12%, from $1.26 trillion to $1.10 trillion, contributing to a 17% decrease in average deal size from $86.1 million to $71.3 million. The 2016 figure was also well below the 2014 average of $85.8 million. The number of billion-dollar transactions involving European companies declined for the second consecutive year, from 180 in 2015 to 157 in 2016. The total value of billion-dollar transactions declined by 18%, from $952.5 billion in 2015 to $778.0 billion in 2016.
  • Asia-Pacific: The Asia-Pacific region saw its second consecutive annual decline in deal volume, by 8%, from 9,444 transactions in 2015 to 8,695 in 2016. Total deal value in the region decreased 14%, from $1.06 trillion to $913.4 billion, resulting in a 6% decrease in average deal size, from $111.9 million to $105.1 million—still the second-highest total deal value and average deal size in the region since 2000. Billion-dollar transactions involving Asia-Pacific companies decreased 11%, from 190 to 170, while their total value declined by 18%, from $674.0 billion to $553.7 billion.

Sector Results

Trends in M&A deal volume and value varied across industries in 2016:

  • Technology: Global transaction volume in the technology sector decreased 9%, from 5,348 deals in 2015 to 4,883 deals in 2016. Despite the decline, 2016 represented the second-highest annual tally since the 6,573 transactions in 2000. Global deal value increased 14%, from $281.8 billion to $321.1 billion—the eighth consecutive annual increase in deal value for this sector. Average deal size increased 25%, from $52.7 million in 2015 to $65.8 million in 2016. US technology deal volume decreased 17%, from 2,768 to 2,296. Total deal value in the United States followed the global trend, increasing 26%, from $171.2 billion to $215.7 billion. This jump in turn resulted in a 52% increase in average deal size, from $61.9 million to a record level of $93.9 million.
  • Life Sciences: Global transaction volume in the life sciences sector decreased 7%, from 1,375 deals in 2015 to 1,283 deals in 2016, while global deal value decreased 13%, from $324.5 billion to $282.1 billion—the second consecutive annual decline in deal value. As a result, average deal size decreased 7%, from $236.0 million to $219.8 million. In the United States, deal volume declined by 6%, from 621 to 582. Total US deal value, however, increased 14%, from $204.0 billion to $231.8 billion, resulting in a 21% increase in average deal size, from $328.4 million to $398.3 million.
  • Financial Services: Global M&A activity in the financial services sector decreased 4%, from 1,577 deals in 2015 to 1,511 deals in 2016. Despite the decline, 2016 yielded the second-highest annual tally since 2007, which marked the end of a four-year period that saw an annual average of 1,779 deals. Global deal value declined by 30%, from $217.7 billion to $152.1 billion, resulting in a 27% decline in average deal size, from $138.0 million to $100.7 million. In the United States, financial services sector deal volume decreased 9%, from 548 to 498, while total deal value declined by 43%, from $116.3 billion to $66.2 billion. Average deal size decreased 37%, from $212.2 million to $133.0 million.
  • Telecommunications: Global transaction volume in the telecommunications sector inched up from 864 deals in 2015 to 865 deals in 2016—the fourth consecutive annual increase in deal volume. Global telecommunications deal value increased 45%, from $153.2 billion to $222.6 billion, a total that, when combined with flat deal volume, resulted in a corresponding 45% increase in average deal size, from $177.3 million to $257.3 million. US telecommunications deal volume increased 4%, from 282 to 294, while total deal value more than tripled, from $41.8 billion to $172.6 billion. The average US telecommunications deal size in 2016, at $587.1 million, was nearly four times the 2015 average of $148.3 million.
  • VC-Backed Companies: The number of reported acquisitions of VC-backed companies increased 6%, from 531 in 2015 to 561 in 2016. Once all 2016 acquisitions are accounted for, 2016 deal activity should be in line with the total of 574 deals in 2014, but will likely fall short of the tallies of 608 and 589 in 2010 and 2011, respectively. Total deal value increased 42%, from $58.1 billion in 2015 to $82.4 billion in 2016, but was below 2014's total deal value of $88.5 billion.

OUTLOOK

Heading into 2017, macroeconomic uncertainty and high stock market valuations may create headwinds for the M&A market, despite high levels of cash held by both strategic and private equity acquirers, an uptick in inbound M&A activity, and the continued desire of many companies to pursue acquisitions to supplement organic growth. On balance, the M&A market remains fundamentally sound, and deal activity in 2017 should approach the aggregate deal volume and value of 2016. Important factors that will affect M&A activity in the coming year include the following:

  • Macroeconomic Conditions: The US economy lost momentum over the last three months of 2016 and the year ended with an annual growth rate of 1.6%—its weakest performance in five years, while the global economy remains mired in the pattern of low growth that has persisted for a decade. Moreover, after raising its benchmark interest rate only once in the preceding decade, the Federal Reserve increased the rate in December 2016 and again in March 2017, and further rate hikes are widely expected in the coming year.
  • Market Conditions: There is growing sentiment that US stocks might have reached their peak valuations in the first quarter of 2017. Record high stock market valuations may discourage buy-side activity by acquirers concerned about over-paying, while also making some sellers less willing to accept buyer stock as consideration because of perceptions of limited upside potential and significant downside risk.
  • Private Equity Impact: On the buy side, private equity firms are sitting on record levels of "dry powder" to deploy, but the supply of capital is intensifying competition for attractive deals and driving up prices. On the sell side, private equity firms—having increased their fundraising for the fourth consecutive year—are facing pressure to exit investments and return capital to investors, even if investor returns are dampened by increases in the level of equity invested in deals.
  • Venture Capital Pipeline: Many venturebacked companies and their investors prefer the relative ease and certainty of being acquired to the lengthier and more uncertain IPO process. Deal volume for sales of VC-backed companies will depend in part on the extent of the ongoing correction in private company valuations, as well as the health of the IPO market. Although the number of US venture-backed IPOs declined for the second consecutive year in 2016, their solid aftermarket performance is likely to generate demand for additional VC-backed IPOs in 2017.

Set forth below is a summary of common takeover defenses available to public companies—both established public companies and IPO companies— and some of the questions to be considered by a board in evaluating these defenses.

CLASSIFIED BOARDS

Should the entire board stand for reelection at each annual meeting, or should directors serve staggered three-year terms, with only one-third of the board standing for re-election each year?

Supporters of classified, or "staggered," boards believe that classified boards enhance the knowledge, experience and expertise of boards by helping ensure that, at any given time, a majority of the directors will have experience and familiarity with the company's business. These supporters believe classified boards promote continuity and stability, which in turn allow companies to focus on long-term strategic planning, ultimately leading to a better competitive position and maximizing stockholder value. Opponents of classified boards, on the other hand, believe that annual elections increase director accountability, which in turn improves director performance, and that classified boards entrench directors and foster insularity.

SUPERMAJORITY VOTING REQUIREMENTS

What stockholder vote should be required to approve mergers or amend the corporate charter or bylaws: a majority or a "supermajority"?

Advocates for supermajority vote requirements claim that these provisions help preserve and maximize the value of the company for all stockholders by ensuring that important corporate actions are taken only when it is the clear will of the stockholders. Opponents, however, believe that majority-vote requirements make the company more accountable to stockholders by making it easier for stockholders to make changes in how the company is governed. Supermajority requirements are also viewed by their detractors as entrenchment provisions used to block initiatives that are supported by holders of a majority of the company's stock but opposed by management and the board. In addition, opponents believe that supermajority requirements—which generally require votes of 60% to 80% of the total number of outstanding shares—can be almost impossible to satisfy because of abstentions, broker non-votes and voter apathy, thereby frustrating the will of stockholders.

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