What happened to all the M&As?

The global mergers and acquisitions (M&A) market has been underperforming for several quarters, with the second quarter of 2019 posting particularly poor results, according to Willis Towers Watson’s Quarterly Deal Performance Monitor, run in partnership with the University of London’s Cass Business School. 

It found that for the first time in a decade, companies in every region of the world lost shareholder value after deal announcements, underperforming the MSCI World Index by 6.3 percentage points.

A separate study by Allen & Overy’s M&A Insights confirms a similar trajectory in which global deal value and volume are down by 12% and 16% respectively in the first half of 2019. The underperformance follows a year in which 55% of deals completed were not able to outperform the market, making 2018 the worst-performing year for deal-making since 2008 and the first year that acquirers have underperformed for all four quarters, according to Willis Towers Watson.

In fact, in the final quarter of 2018, deals valued from $100m to over $10bn significantly underperformed the Global Index by an average of 3.5 percentage points, while the fourth quarter saw just 208 deals closed, the lowest final quarter figure in the past six years.

In large part this was due to the decline in the number of Asian deals. However, the number of megadeals closed in the fourth quarter of 2018 is currently at seven, the highest quarterly figure for this year and not seen since 2016. That said, megadeals are currently underperforming the market by 9.5 percentage points, the worst performance of all deal types, according to the Willis Towers Watson.

There are multiple reasons why deals are lagging in performance. They include geopolitical, trade and tariff uncertainties, overstretched M&A valuations and increased protectionism against cross-border M&A deals and global trade flows, according to Jana Mercereau, Willis Towers Watson’s head of corporate M&A for the UK. “Taken together, the impact on deal performance is perhaps understandable,” she said.

The short term appears to be just as challenging for acquirers to navigate, as trade wars intensify, Brexit uncertainty persists and the rise of shareholder activism, Ms Mercereau continued.

Allen & Overy’s M&A Insights, for example, reported that statistics show that shareholder campaigns reached a new high in 2018 and with far greater global reach than ever before. “More importantly, an increasing number of attacks were focused on transactions, with one study suggesting a third of campaigns were M&A related,” it said in its report.

The good news is that Willis Towers Watson and Cass Business School believe that the global M&A market will bottom out this year, especially as there is expected to be more clarity on US trade policies and Brexit. Indeed, Allen & Overy’s M&A Insights pointed out that the first half of 2019 stands as the third strongest on record for global M&A. It is also the third time the first half-year has hit the $2000bn mark, it said.

The trend towards protectionism will also aid some nations and regions that can take on a more defensive strategy of domestic consolidation, said Gabe Langerak, western Europe head of M&A at Willis Towers Watson. For example, he noted: “The European cross-border M&A market is likely to remain buoyant, and it may even grow, given the strong links within Europe and the relaxation of regulatory constraints within the region.”

Performance in Asia-Pacific, for its part, is expected to remain poor, with the region recording the worst annual performance of all regions in last year, with an underperformance of 17.1 percentage points below the regional MSCI Index, according to the Willis Towers Watson. As for the UK, Willis Towers Watson reported that outside interest remains strong even as ongoing uncertainty around Brexit is likely to translate into less M&A activity for UK companies in 2019. It added that the positive results non-UK acquirers realised when buying in the UK will allow the country to remain one of the most popular M&A target nations.

Megadeals, by contrast, are expected to continue to struggle as global political uncertainty shows little sign of diminishing. Ultimately, Ms Mercereau is cautiously optimistic about deal-making in the longer term. “Technology disruption, changing consumer behaviour, the slowdown in the growth of emerging markets and record cash reserves will drive companies to get into the M&A market,” she said. However, decision-makers must focus on target selection, diligence and execution if they are to give themselves the best chance of success, she concluded.