Slow start but impressive deal values for Q1 2016

M&A Index reveals slow start to 2016 but promising deal values

Following a record final quarter in 2015, cross-border deal activity got off to a slow start this year as the slowdown in China, slump in oil prices, threat of Brexit and volatility in the equity markets led investors to be more cautious.

As a result, Baker McKenzie’s Cross-Border M&A Index, which tracks quarterly deal activity using a baseline score of 100, dropped to 213 from its peak of 358 last quarter. However, it was still seven points higher than the same period last year, with buyers announcing 1,202 cross-border deals worth US$324bn, a 10% drop in volume but 14% rise in value compared to Q1 2015.

While M&A volume between regions fell 13% this quarter compared to the same period last year, deal value rose 19% from US$190.1bn to US$225.7bn fueled by megadeals involving Chinese buyers. The largest was ChemChina’s acquisition of Swiss agribusiness Syngenta for US$45.8bn, representing 14% of all deal value in Q1 2016.

China invested a record US$54bn in Europe and North America in 2015, a number expected to rise even higher this year as China continues its outbound M&A spree on the road to becoming a consumer economy.

In intra-regional deals, the drop in volume was not as marked as in cross-regional M&A, although the increase in value was nowhere near as steep. Volume fell 4% year-on-year, while value only rose 5%. These figures, coupled with the strong increase in cross-regional deal values, indicate that acquirers are looking farther afield for growth and possibly taking advantage of strong domestic currencies to secure better deals.

However, consolidation pressures in certain industries did generate a few notable intra-regional deals in Q1, such as Canadian utility Fortis’ acquisition of US electricity business ITC Holdings for US$11.2bn.

M&A activity could rise in coming months if China continues to target major assets in Europe and North America, particularly in the automotive, real estate and hospitality, financial and business services, and information technology sectors — the four industries that accounted for 73% of China’s total outbound investment in 2015.

Lower energy costs should also spur greater M&A activity in sectors like manufacturing as companies take advantage of increased profits, as well as prompting a spike in distressed-driven M&A in the energy sector.