The number of merger and acquisition (M&A) deals that have collapsed this year is the highest since 2008.
In pharmaceuticals, high-profile aborted deals include AbbVie/Shire and Pfizer/AstraZeneca. Other notable failures include French telecom group Iliad’s bid to acquire a majority stake in Deutsche Telekom’s US subsidiary, T-Mobile, and a proposed merger between Norwegian fertiliser manufacturer Yara International and its US counterpart CF Industries.
But do these indicate the top of the market, or are businesses refusing to sell at what they perceive to be low valuations?
According to Standard Life Investments, this spate of failed M&A deals has coincided with a rise in earnings disappointments and increased market volatility. “We think there are a few factors unnerving buyers, including some concerns about due diligence,” a company spokesman said.
“We also note that the US authorities are taking a tougher line on those attempting tax-inversion trades. We believe jittery markets make both buyers and sellers nervous about the price they are making/taking, as they will have to live with the consequences for some time.”
Chris Murphy, Aviva Investors’ UK equity income fund manager, agrees that the Pfizer/AstraZeneca and AbbVie/Shire deals foundered because of US tax authorities tightening up on the tax benefits available to inverted companies.
“This was the sole reason for the deal in the first place,” he claims. “So it is hard to draw any trends or implications arising from this. There was a loophole. They tried to exploit it. The loophole was closed. The deal fell through.”
Mr Murphy also points to Deloitte’s Q3 2014 M&A activity paper, which examines the perception that a large number of deals have fallen through. It concludes that on average, 3 per cent of deals are withdrawn each year and that 2014 has been no different.
“The difference is that a small amount of large deals have fallen through,” he says. “For example, one high-profile pharma deal that fell through accounted for 43 per cent of the total withdrawn deals by value.”
Jean Maigrot, NewSmith European equity investment leader, says although conventional wisdom suggests we are at the top of the M&A market, there has not been a slew of mega M&A deals in Europe.
“Overall, the big deals have failed for various reasons,” he says. “In the case of Pfizer/Astra, there was a misconception by Astra’s major shareholders on the exit multiple. They wanted too high a price, and the due diligence carried out by Pfizer did not warrant it.”
He also believes geopolitics played a role, in that AstraZeneca’s Swedish shareholders and stakeholders were uncomfortable with the implications of a US takeover for jobs as well as research and development.
Paras Anand, head of European equities at Fidelity, says he is not surprised a period of stockmarket volatility has led to some shorter-term caution around potential M&A deals and the number of new issues coming to the market. He also cites the US crackdown on company inversions for the failure of the AbbVie/Shire deal, but thinks corporate activity will continue to be a feature of markets in the coming year.
“In the absence of a strong improvement in global end demand and with balance sheets as robust as they are, many businesses will seek to create value for shareholders through consolidating their industries or accessing new markets through M&A,” he says.
Few investors target M&A as a key source of alpha, but it does help if their holdings are taken over. So how has M&A helped managers’ portfolios, and have investors seen M&A having less of an impact on performance numbers of late?
A spokesman for Standard Life Investments said: “SLI does not target M&A trades but often thinks along the same lines as many corporate and investment buyers. We focus on cashflows and rate businesses according to perceptions of profit, volatility, capacity for leverage and so on.”
Mr Murphy says: “Aviva Investors strongly believes we should stick to our fundamentals in the way we look at businesses. If your holding becomes a target, then that can be beneficial. But we think chasing the next bid target is a dangerous game.”
NewSmith’s Mr Maigrot thinks specialist M&A funds, largely hedge funds, will have taken heavy losses on the Shire and Astra failures and that it is dangerous to focus exclusively on M&A as an investment strategy.
He says he has moved away from M&A as a strategy, since the low margins make it harder to make a return and there are too many obstacles in the way of successful deals. “You can invest in stocks which could be M&A targets. It just should not be your principal driver,” he says.
“Two stocks I am long on are Burberry and ITV. I think they could both be taken over at some stage, which would be a nice bonus, but I really bought them because I like their fundamentals.”
While much investment commentary focuses on high-profile M&A deals, Fidelity’s Mr Anand maintains that ‘corporate renewal’ is more likely to benefit investors in European equities. He explains: “This is a term I am increasingly using to describe the number of businesses across the corporate sector making profound changes to their business portfolios in order to deliver better returns to shareholders over the medium term.”
Such restructuring, he believes, may be less lucrative to investors in the short term than M&A deals, but he is convinced that benefits will accrue in the long term.
