2015 witnessed an all-time high in M&A deal value at over $5 trillion, according to Dealogic. The high volume was primarily attributable to strategic megadeals that used stock as full or partial consideration, with healthcare and technology as the two most targeted industries.
In 2016, we continue to expect to see heavy M&A volume in healthcare with similar drivers. Big pharma will likely continue to try to fill product pipelines as high-revenue drugs go off patent (they seem to favor orphan, specialty and cancer drugs for hard to cure indications or for patient populations that are refractory to first line therapy). Specialty pharma may continue to compete for approved drugs that are underperforming where commercial execution can be improved. And development-stage life science companies will continue to consider M&A among its strategic alternatives in light of the challenges involved with transitioning from a development-stage company to a commercial drug company. Inverted pharma companies are likely to continue to use tax rate differences to create synergies that drive acquisitions.
Deal activity is expected to remain strong. Almost nine in 10 respondents expect deal activity to continue at the same pace or increase. While private equity investors (PEI) were the most optimistic, they are less bullish than they were a year ago.
Corporate respondents and private equity investors cited economic conditions as the top factor for deal success. Both segments of respondents cited interest rates as the second most important factor, followed by uncertainty surrounding the 2016 US elections.
Corporations see an increase in both smaller strategic deals and major transformational deals. As respondents look at the next 12 months to take advantage of favorable opportunities, 34 percent will look for smaller strategic deals while another 26 percent indicate they will seek major transformational deals.
Companies are holding steady in looking abroad. Both corporates and PEIs are continuing to source foreign targets at the same pace as 2015 (75 percent and 84 percent, respectively).
More divestitures are planned for 2016. Significantly more corporate respondents plan to pursue divestitures this year than in 2015. The drivers? Shed non-core assets in the year ahead, help focus their business, and in some sectors, raise capital.
In tech, M & A deal volume remained consistent but largely under the radar in 2015. Larger private and public companies continued to acquire talent and valuable assets, on generally favorable deal terms (if not valuations), but often on a smaller scale than anticipated. Because the public and private capital markets remained open for a large part of last year, many successful private companies retained pricing leverage over buyers or continued to prioritize IPOs over M&A exits—which may have depressed transaction volume. This year, with the volatility in the capital markets (and the unicorn phenomenon becoming more uncertain), we expect these companies and their institutional backers to be more receptive to M&A in 2016. We also note that large cap tech companies still have substantial cash on their balance sheets that can be used for acquisitions if targets become more affordable.
Private equity buyers, which have been relatively quieter in the markets due to high valuations, will likely be more active in 2016, as they seek new opportunities to buy unwanted assets or businesses (including those needing to be divested) from strategics. We also expect PE-to-PE sales and incremental add-ons to continue, assuming no major upheaval in the debt markets—a big assumption in the current environment.
We also expect cross-border M&A activity to continue unabated at high levels of volume in 2016 as deal makers continue to take advantage of, among other things, tax optimization and efficiency, fluctuations in currency prices (particularly in China) and pricing arbitrage from one country to another.