EY has released its mid-year M&A report, highlighting relatively flat deal value year-on-year compared with the first half of 2015 but a significant decrease in deal value, down 18% year-on-year.
Steve Krouskos, EY global vice chair and one of the chief contributors to the report, puts this down to a lack of megadeals. There were eight fewer deals year-on-year worth more than $10bn. Mr Krouskos believes this is mostly down to timing. “I actually think that the value gap will close a little bit. I think we’ll be down less than 18% by the end of the year,” he told fDi. “I think 2017 will be a very strong year because you’re going to see some of the activity spill over that was maybe delayed a bit this year in the UK and Europe, and I think all the trends we talked about [in the report] will continue to create activity.”
These trends including a huge increase in Chinese companies’ M&A activity as well as the drive to acquire of digital capabilities.
Chinese activity in just the first half of 2016 has already surpassed 2015 as a whole and set a new record for Chinese companies. They completed 387 M&A deals so far in 2016 worth a total value of $129bn (compared with $97.6bn in 2015, which was itself a record).
A key factor behind this increase was greater encouragement from the Chinese government regarding outbound activity. “[The government] have taken out the review process. They used to review every outbound deal. Now they only review every outbound deal over a billion US dollars,” says Mr Krouskos. “We suspect that pretty shortly they will do away with the review process completely regardless of size. I expect Chinese outbound activity to continue at a very high rate.”
The report also reveals that the acquisition of companies with digital capabilities will be a significant motivating factor behind M&A activity. According to a study highlighted in the report, nearly two thirds of more than 600 non-technology corporate executives say they are planning to acquire digital capabilities in the next two years. “What you see across most sectors is in some cases it’s buying companies with digital capabilities and in some cases it’s buying a company because of the digital disruption that’s happening in their industry,” says Mr Krouskos.
He adds that while the outcome of the UK’s EU referendum result has delayed some deals from taking place, it will not slow M&A activity in the long term. “If a company has a strategic imperative they’re not going to waver in that,“ he says. “The UK is still a major market, it’s a place that companies have to play, it’s got great IP, it’s got great talent. You have to play to win in the UK.” He adds that M&A activity might even increase due to the lower currency and prices.