Source: Jeff Golman from Forbes
As corporate M&A values break records, in both highest level and largest share of the M&A market in 2017, it is apparent that competing investors are being outbid. With 70% ownership of the total M&A market in the first half of 2017, corporate buyers have been enhancing their place in the market for years. By the end of 2016, these strategic acquirers had invested $1.7 trillion on M&A, an increase from the $1.6 trillion spent in 2015 and more than double their deal value in 2010.
One of the reasons for this dramatic rise in corporate purchasing is corporate cash reserves are at a 10-year high. S&P Global Ratings reported that the top 25 non-financial corporate borrowers held more than half of the record $1.9 trillion in cash and liquid investments by year end. Stockpiling nearly $1 trillion in ready investment capital, these top 25 companies are retaining nearly double the $510 billion they held only five years ago. Although corporations have also used this excess cash to hike dividend payments and continue with share buybacks, they have increasingly looked to M&A opportunities to increase their market share.
With plenty of readily available investment funds, corporations have been utilizing M&A purchases to ensure transformational acquisitions that provide material cost savings and revenue synergies. By acquiring and merging similar businesses, these strategic buyers have been able to achieve their accretive goals quickly. For example, Clariant AG’s purchase of Huntsman Corp. for $10.3 billion this year followed “a record run of consolidation in the global chemicals industry.” In order to compete with other chemical companies who are consolidating and seeking synergies, Clariant noted they believe the acquisition will achieve nearly $400 million in cost savings.
Corporations also have the capital space, credit lines and shareholder support to make accretive acquisitions and roll them into existing operations. The acquisition of Mead Johnson Nutrition Co. by Reckitt Benckiser Group plc for $17.7 billion in June 2017 is a recent example of such a transaction. Reckitt Benckiser Group was able and willing to invest in expanding its ‘powerful consumer health portfolio’ for a very high price.
Corporate buyers have turned to M&A to improve the makeup of their business and better withstand the dynamic landscape in a given industry. This was recently seen in the June 2017 purchase of Whole Foods Market by Amazon for $13.7 billion, giving it an improved competitive edge against Google Express, whose online retail delivery service now reaches 90% of the U.S. This acquisition gives Amazon “440 refrigerated warehouses within 10 miles of probably 80% of the population” thus giving their AmazonFresh grocery delivery service numerous and requisite distribution centers.
Similarly, Intel’s recent purchase of Mobileye NV for $15.3 billion in March 2017, further demonstrates that corporate dealmakers are willing to pay the premiums necessary to acquire growth. After missing the opportunity to break into the smartphone business, Intel Corp. intends to get its ‘chips’ into the self-driving car business, a viable avenue that would likely lead to the kind of significant growth corporate dealmakers aim to achieve.
These competitive factors drive prices up and often make it more difficult for financial sponsors to complete purchases as mega deals dominate. At the end of last year, more than 54% of the total value of the M&A market came from transactions valued at $5 billion or more, compared to 45% in 2015 and just 33% in 2010. United Technologies Corporation’s (UTC) recent revelation on September 4, that it would buy Rockwell Collins, Inc. for a lofty $30 billion is just one dramatic and very timely example. Reflecting a common corporate merger goal to unite the two businesses strengths, UTC’s Chairman/CEO, Greg Hayes stated, “This acquisition adds tremendous capabilities to our aerospace businesses and strengthens our complementary offerings of technologically advanced aerospace systems.” In addition to these outcomes, they are expecting this transaction to provide cost synergies of over $500 million.
As corporate shareholders and boardrooms explore various M&A routes to find accretive growth in their underlying operations, financial buyers continue to garner new interest, bolstering their deployable capital going forward. As of July 2017, financial sponsors’ available capital reached $963 billion giving financial buyers a substantial amount to compete within future M&A deals and begin to give strategic buyers more competition for deal targets.