Q4 Index dips slightly but stage is set for future deals

With global events remaining turbulent and unpredictable throughout Q4 2016, this quarter’s M&A index dipped very slightly on the previous quarter but overall market conditions look good for long-term dealmaking.

Uncertainty in the aftermath of the Brexit vote and the US election result, ongoing political destabilization in Europe and slower deal activity out of China have had a downward effect on M&A year-on-year but the market has remained fairly resolute quarter-on-quarter. Buyers announced 1,429 cross-border deals worth US$388.2bn, a 2% uplift in volume and only a 1% drop in value compared with the previous quarter.

With the market stabilizing, it is not surprising that Baker McKenzie’s Cross-Border M&A Index, which tracks quarterly deal activity using a baseline score of 100, dipped only very slightly to 249 in the final quarter of the year. This is down 1.5% from the previous quarter. However, it has fallen by 30% from 2015’s record-breaking fourth quarter total of 358.

Despite the fall in dealmaking, the Index in Q4 remains higher than it was at its launch in 2009 through to 2013. And this is very much in keeping with cross-border M&A trends for the whole of 2016 – which has seen the value of deals fall when compared to the blockbuster years of 2014 and 2015 but rise above all other post-crisis years.

The year-on-year decline in M&A can be attributed to political and economic volatility coupled with a stricter regulatory environment, which has seen a record number of deals fail. However, strong sectoral performances, a rash of megadeals and increasing outbound deals from China and Japan have led to a robust, rather than a roaring, year.

On the sector side, industrials lead the way this quarter, with 227 deals worth US$19bn (compared with 196 deals worth US$29.1bn in Q3). Technology deals enjoyed the highest value with US$66.9bn, followed by energy and utilities (88 deals worth US$63bn). Half of the top ten deals of the year were either in the technology or energy and utilities sectors.

However, fourth quarter figures were bolstered by strong PE buyouts, which accounted for just under 20% of all Q4 activity by value (against an average of 13% since 2009). KKR picked up Japanese auto parts company Calsonic Kansei for US$4.3bn, which suggests that buyout firms are taking advantage of current uncertainty and depressed activity, and snapping up attractive assets – activity that may well continue into 2017.