Citi proves there is life left in M&A mega-deals

From left: Brian Link, Cary Kochman, George Tierney, Christina Mohr, Mark Shafir

Are global mergers and acquisitions (M&A) running out of steam? In 2019, first-half M&A volumes worldwide were nearly 10% down on those in 2018, as investor sentiment appeared to cool. But the two investment bankers who run M&A at Citi say the outlook is positive, at least in the long term, for several different reasons. Since theirs is one of the industry’s most visible M&A teams – Citi was an adviser on four of the first half’s five biggest takeovers – their views carry some weight.

Global volumes fell from $2362bn in the first half of 2018 to $2160bn in 2019. “This year has seen the third best global start in history,” says Mark Shafir, Citi's New York-based co-head of global M&A. "But it has been a narrow market, heavily skewed to North America, whose share was at a 20-year high.” He notes that while North America is always the biggest M&A region, its dominance has been magnified by double-digit declines in the first half of 2019 in Europe, which fell by 30%, and Asia Pacific, down by 19%.

“We typically see 55% of global activity in North America, but at some time this year it has been as high as 65%,” says Cary Kochman, co-head of global M&A and head of Citi's Chicago office, where he is based.

North American confidence

The European market has been impacted by Brexit and softness in the German market, according to Mr Kochman. Much is spoken of Chinese M&A, he adds, but historically this has never accounted for more than 5% of overall volumes. “On a relative basis, North America has benefited from a better economic outlook and more confidence. A change in tax rates has also contributed. At the same time, we have seen the lowest cross-border volumes since records began,” says Mr Kochman.

Cross-border activity was 21% of global volume in the first half of 2019, down from 35% in 2016 – and an all-time high of 39% in 2007, before the financial crisis. China outbound transactions have fallen each year since 2016 and a more protectionist environment in general has contributed to the subdued level of cross-border transactions.

What has kept volumes high is a slew of very big deals, mostly, though not exclusively, in North America. A record-breaking 14 transactions valued at $20bn or more were announced in the first half of 2019, worth a combined $700bn. By comparison, in the second half of 2018 there were only three $20bn-plus deals, adding up to a collective $140bn.

The biggest came only three days into the new year, when US biotech company Celgene agreed to be acquired by Bristol-Myers Squibb for $96.8bn, made up of cash, shares and contingent value rights (CVR). The CVR becomes tradeable if and when regulators approve certain pipeline drugs. Citi advised Celgene.

While shareholder activists opposed the deal and regulators have since raised other issues, more than 75% of Bristol-Myers shareholders voted it through. “Strong conviction from management on the strategic rationale for a deal is always important, especially in an era of rising shareholder activism,” says Mr Shafir.  “And shareholder communications are key to securing a favourable vote.”

Rise in activism

Fifteen years ago, the marketplace was largely passive, whereas today institutional shareholders are much more receptive to activist campaigning. As part of its suite of products and know-how, Citi has invested in shareholder analytics so that it can provide more insights in this area to its clients. “We use cutting-edge predictive analytics to help clients assess the risk of activism, and to show how external events might affect the shares,” says Mr Kochman.

This rise of activism has shifted the balance of the investment banker's workload. “We used to do a lot of work pre-announcement, and then less from there to closing,” says Mr Shafir. “Today, transactions post-announcement are an increasing challenge.”

Citi's M&A team combines imported and home-grown talent, though with an emphasis on the latter. The bosses are imports, each having had a successful earlier career elsewhere. Before he moved to Citi in 2008, Mr Shafir was global head of M&A at Lehman Brothers, while Mr Kochman was global head of M&A at UBS before joining Citi in 2011.

Both were impressed with what they found at Citi. “There was home-grown talent that exceeded my expectations,” says Mr Kochman. The duo have chosen to continue growing with the home team, supplemented by regional, lateral hires in Asia and Europe. The result is a demographic group in their low-to mid-40s who have been together for a long time.

“We used to be seen as a buy side financing M&A shop, but our capabilities go well beyond that,” says Mr Kochman. “And we have a combined footprint in 160 countries. No one else has that [global reach] – it's a differentiator for us.” He believes that the benefits of globalism will continue over the long term and that, in a world of increasing complexity, Citi is well placed to add value for its clients.

Big deals

Citi was an adviser earlier in 2019 to Saudi Basic Industries Corporation (Sabic) when the Saudi sovereign wealth fund, PIF, sold its 70% stake in the business to oil giant Saudi Aramco in a deal worth $69.1bn. Citi was also sole financial adviser to defence contractor Raytheon, in the company's ‘merger of equals’ with United Technologies (UTC), whose shareholders will end up with a majority of the shares in the combined company.

Citi has been involved in M&A activity for both Raytheon and UTC in the past few years, including UTC's purchases of aerospace manufacturer Goodrich and avionics specialist Rockwell Collins. The bank reckons its deep knowledge of the aerospace and defence sector has helped to shape Raytheon's future direction as a combined leader in this market.

 “Our sector and product knowledge has developed over many years,” says Mr Shafir, "and we have the ability to bring all aspects of the very broad-based Citi platform to bear for our clients.”

The smallest of Citi's four mega-deals this year, but the most dramatic, involved a $58.1bn victory by Occidental Petroleum (Oxy) in its bidding war with Chevron for Anadarko Petroleum. Citi advised Oxy, having been engaged in late 2017 when Oxy first began taking an interest in the target. Several offers were rebuffed or ignored until, in April 2019, Chevron announced it had an agreed deal with Anadarko for some $48bn including debt.

Oxy had to decide whether or not to proceed. “We applied analytics, and said here’s how and these are the risks,” says Mr Shafir, describing Citi's role as  “pure M&A product”. Oxy secured Anadarko's agreement with the largest successful topping bid in history, and Citi was left-lead arranger on the $21.8bn bridge loan facility. The deal has yet to close, and Oxy shareholder Carl Icahn has launched a proxy fight, saying it hugely overvalues Anadarko.

Reasons to be cheerful

Hostile bids in general are down, having never regained their 2007 peak. They are expensive and fewer than half of them succeed. Nearly half of 2019’s unsolicited M&A volume is from the two competing offers for Anadarko.

For some years after the financial crisis, shares in bidding companies actually went up when they announced a takeover. Those days are gone, and the market has recently been marking down bidders’ shares aggressively after acquisition announcements – by 9% over the first two days in Oxy’s case and 7% for UTC.

Mr Shafir remains optimistic about M&A's prospects, however. One reason is shareholder activism, which often calls for the disposal of assets. Another is the fire power of private equity funds. “The size of their funds is at an all-time high, having risen from $750bn to $1000bn,” he says. “They can lever that two to three times, so it's a lot of dry powder.”

Another powerful stimulus is technological disruption, as it disintermediates existing business models. That is a big driver for companies to pay the price of acquisition, so as not to be disrupted, Mr Shafir notes.

Mr Kochman points to another cause for optimism, based on the historic level of M&A volumes as a proportion of equity market capitalisation. “That has traditionally stood at roughly 2%,” he says. “At the height of M&A activity after 2000, it was running at 3% or 4%. Today, as equity markets in Europe and Asia have grown bigger, that figure is down to 1%. So while volumes may be high, relative to equity market cap, they are not at high levels.”