The co-head of global M&A at Bank of America Merrill Lynch, Adrian Mee, talks to Danielle Myles about China’s role in the growth of cross-regional deal-making, and why Brexit has complicated, rather than halted, UK investment decisions.
When German chemicals company Bayer announced its $65.7bn takeover of US-based Monsanto in September, it made headlines for being the biggest all-cash deal in history.
While the price tag was eye-catching, its real significance ran much deeper. Bayer/Monsanto embodies many features driving the merger and acquisition (M&A) market’s direction of travel: it is cross-regional, a meaningful size and potentially transformative in that it could create a global agricultural giant.
On the frontline
Bank of America Merrill Lynch (BAML) is in a good position to take full advantage of this kind of deal flow. Its instrumental role on Bayer/Monsanto, as one of the buyer’s financial advisers and joint underwriter of its corresponding $57bn bridge loan, is a good example of why.
“This is exactly the kind of transaction that is core to BAML’s M&A strategy – combining strategic advice on a very large complex cross-border transaction with our capacity to commit significant amounts of capital in support of our clients’ acquisitions,” says Adrian Mee, global co-head of M&A at BAML.
This is just the latest in a string of marquee transactions on which BAML has advised. They include the $36bn all-equity merger of Agrium and Potash Corporation of Saskatchewan, Abbott Laboratories’ purchase of St Jude Medical, and London Stock Exchange’s merger with Deutsche Börse.
These mandates, along with BAML’s regular top four ranking in the league tables, reflect the importance it places on running a truly international M&A business. A rearrangement of the division’s leadership in April that saw the appointment of three global co-heads – Mr Mee based in London, Patrick Ramsey in New York and Jack MacDonald in Palo Alto, California – only reaffirms this.
“We are focused on being a market leader on a global basis and also in each of the three main regions. We want to be the key adviser in the large, transformational strategic deals that are happening, as well as in the flow M&A business,” says Mr Mee, adding that when clients need it, BAML wants to make its financing capabilities available too.
China accelerates
Within the cross-regional theme, China outbound transactions are growing exponentially. Deals involving a Chinese buyer and non-Asia-Pacific target grew from $40bn to $50bn in the three years to 2014, and up to $59bn in 2015. This year, however, the numbers have skyrocketed. In September, volumes were on track to reach $210bn by year-end. Chinese acquirers became more prominent in global M&A during the post-crisis years, but as recently as 2013 natural resources were the primary target.
Since then, their modus operandi has changed dramatically, as witnessed by Mr Mee first hand. “They are looking for growth, technology and expertise and business models that can be replicated in China, but also there is an overall impetus to externalise capital. A number of new private equity-type firms that weren’t visible two or three years ago have been one of the conduits for this type of investment,” he says.
These funds are particularly active in deals around the $5bn mark, which they can fund by forming a small consortium or even individually. In many ways, they epitomise how the Chinese buyer universe has professionalised. In contrast to a few years ago, as a category of bidder they are active participants in global auctions, agree to reverse break-up fees and work within deal timelines.
A tough act to follow
China aside, deal flow for 2016 is tipped to be about 25% to 30% less than the record $4769bn announced in 2015. It is still a bumper level of activity though, similar to 2014, which was then the biggest year since the crisis. The main drivers include sluggish economies (which prompts companies to grow by acquisition rather than organically), cheap borrowing costs and markets that have largely recovered from January and February’s volatility.
“The financing backdrop was a little challenging in the first part of the year, but coming out of the summer it has felt much stronger, on both the equity and debt side,” says Mr Mee. “Even if we see rates tick up in the US later this year, absolute funding costs remain very low, which is supportive [of M&A].”
While all of this bodes well for agreeing transactions, completing them – particularly the cross-regional ones that represent a growing proportion of overall volumes – can be a different story.
“For the bigger deals that encompass more complexity and involve more jurisdictions, these are taking longer to close,” says Mr Mee. “This is principally due to regulatory clearances, certainly those involving Mofcom [China's Ministry of Commerce], but other jurisdictions as well." The longer these approval periods become, the greater the scope for intervening events to cause the deal to fall through.
One of the sector’s hardest hit by regulatory intervention in recent years is pharmaceuticals, if not at the hands of antitrust authorities such as Mofcom, then the US Treasury via its clampdown on tax inversions. That said, Mr Mee sees the sector bouncing back. “After an exceptionally strong 2015 across the board, there was a marked slowdown early in the year. However, we expect a pick-up, particularly on the bio-pharma side, and we’ve already started to see this,” he says.
Perhaps the best evidence is Pfizer’s $14bn takeover of Medivation, which was agreed in August. The other sectors Mr Mee sees on the horizon are tech, industrials and even energy. “After a few years of rather limited activity, following the stabilisation of the oil price, we expect consolidation among the mid-sized companies, as well as deal activity involving the large players,” he says.
Navigating Brexit
The major headwinds stem from politics: elections in major markets – namely the US, France and Germany – which typically lead to more caution, and of course the UK's impending divorce from the EU. After the UK’s June referendum there was a slowdown in deals involving UK buyers or targets, but they have not stopped entirely.
SoftBank's £24.3bn ($30.2bn) acquisition of the UK's ARM Holdings was announced in July and closed less than two months later. Also in July, AMC Entertainment announced its $1.2bn takeover of London-based Odeon & UCI Cinemas. Mr Mee believes one reason why deals with a UK element are continuing is Brexit’s unknown timeline.
“If we were expecting answers in, say, three months’ time, decisions would likely be postponed until after that. But given there will be a very extended period before there is any clarity, I’m not sure people will wait,” he says. “Instead they will be careful in their assessment of a potential deal, and then move.”
Even if Article 50 is triggered by the end of March 2017, as prime minister Theresa May has suggested, many are sceptical that negotiations could be completed by the two-year deadline imposed by EU law. And the fallout from the eventual agreement could stretch over many years.
Instead, Mr Mee expects buyers in particular to be more deliberate when assessing opportunities in the UK. Major considerations will include the extent to which the target is a gateway to Europe and, given sterling has hovered around a 30-year low since the referendum, foreign exchange.
While much has been said about UK businesses becoming cheap targets, he says strategising in relation to foreign exchange is much more nuanced. “It’s not a straightforward equation. The price, be it in sterling or foreign currency, will have changed since the vote, but that has always to be seen relative to the target business’s underlying cash flows,” he says. For example, if it is a predominantly UK business, its revenues could be hit by the low growth forecasted and again when it is converted to the new owner’s home currency.
It is the same consideration, but the opposite situation, for UK acquirers looking overseas. The number of buyers pressing on, despite these complications, means the fallout from Brexit is proving more benign than many expected. It is also contributing to a robust M&A outlook.
This year will fall short of the heady heights of 2015 in terms of overall deal volume and the number of mega-deals (those valued over $10bn). But what has happened in 2016 suggests the emergence of more measured and global deal making: a good sign for the market as well as banks such as BAML.
