One of the notable features of, and a significant positive contributor to, equity markets’ performance in recent years has been the healthy level of merger & acquisitions (M&A). Happily, for equity investors, this is a trend that shows little sign of slowing any time soon. So far in 2017, while the number of transactions is little changed (17,207 deals vs. 17,107 to the end of May), the value of those transactions, at US$2.60 trillion, is up a whopping 43% year on year.
This move towards larger deals reflects a reversion back towards trends seen back in 2015 – often referred to as the “year of the megadeal” – whereas 2016 was more focused on mid-market activity. Importantly, as you can see from the chart, deal flows during 2015 and 2016 were above levels not seen since 2007, prior to the global financial crisis.
Somewhat ironically, the M&A transaction that has grabbed the most attention this year is one that didn’t even go ahead. Had it succeeded, the hostile takeover of Unilever by Kraft would have created a company with a market capitalization in the region of £120 billion, making it the largest deal in history. The bid came to a swift end, however, due to (among other things) differing philosophies within the two boardrooms: Unilever’s is very much a “long game” strategy – pursuing sustainable growth in earnings and dividends to raise long-term shareholder value – whereas Kraft and its Brazilian owner 3G advocate maximising short-term growth to increase near-term valuations. Interestingly, the value of Unilever’s stock is has increased 16% – more than three times the UK market – since Kraft backed away for the bid in mid-February.
Although the Unilever bid had very little impact on our portfolio holdings, a number of our preferred fund managers have benefited from the strong trend in M&A. For example, Aberdeen Asset Management (in merger discussions with Standard Life), is a long-standing top 5 position within GVQ UK Focus Fund and is merely the latest in a series of holdings that have been the target of takeover approaches during the last two or three years. Fund manager Jamie Seaton does not see this trend in ending anytime soon, as he “Continues to see a buoyant M&A backdrop helped by robust corporate balance sheets”.
One area of the market that has seen a good amount of M&A activity of late is healthcare and in particular the biotech sector, where we are invested through one of our thematic positions. Our favoured manager, Polar Capital Biotechnology Fund, concentrates on the mid- and small-cap space, where, rather than invest in-house, there is a growing trend for large-cap healthcare companies to effectively “buy in” R&D by taking out smaller innovative players within the industry. Again, Polar’s team expects this activity to continue for the foreseeable future, particularly given the attractive valuations at which many of the potential target stocks are priced.
In summary, we see this healthy activity across differing sectors in global M&A an ideal backdrop to provide a beneficial tailwind for both developed and emerging market equities going forward and are well represented within our investment solutions.Global M&A Continues to Look Robust