While emerging market M&A showed steady quarterly increases throughout 2013, it is the western, developed markets that appear to be coming back into favour with dealmakers due to their economic recovery, high quality assets at attractive valuations, and political stability.
This natural rebalancing of M&A activity is expected to continue as 2014 progresses, according to the 'Insights into M&A Trends 2014: Global Dynamics' report from law firm Clifford Chance.
The US, the world's largest market for M&A, is anticipated to be even stronger in 2014 buoyed by increasing confidence in its recovery, with the TMT and Energy and Natural Resources sectors dominating the M&A landscape. Australia's weakening dollar and revitalised IPO pipeline provide positive signs that there will be a general pick-up in Australian M&A in 2014, following a 52% hike in activity last year.
On the back of relatively strong performances in 2013, the UK, Spain and Germany are expected to be the more active European M&A markets this year. The UK has the strongest M&A market in Europe, with US$ 111.6bn of deals in 2013, and is the preferred destination for investment outside the euro zone. Meanwhile Spain is expected to be a key target in 2014, with its distressed debt opportunities and attractively valued assets.
Germany is viewed as the safe option with its stable political regime and strong economic foundations. In addition, Italy's new coalition government is starting to attract foreign investment into the country while foreign divestment and privatisations are creating opportunities for infrastructure and strategic investment.
Analysis by Clifford Chance for the report showed that Europe was the most targeted region for cross-border deals in 2013 as investors focus on acquiring technology, skills and brands at attractive prices. Overall cross-border M&A was lower in value in 2013 than in 2012 with deals totalling US$ 781bn (35% of M&A deal value). Inter-regional M&A comprised 22% of total M&A activity.
Matthew Layton, Global Head of Corporate at Clifford Chance, said: "The general upward trend in global M&A activity through 2013 reflects a tentatively growing confidence in the market. As noted in our European M&A: On the Road to Recovery? report in June last year, we are beginning to see a turning point take hold as the western economies come back into favour with dealmakers, including those in Europe.
"All signs point to a slow and steady recovery in the M&A market in 2014 and beyond. Looking ahead, we expect to see stronger M&A activity as global economic conditions encourage the appetite in the boardrooms to put some of the estimated US$ 4.2 trillion of cash on corporate balance sheets towards M&A opportunities.
"Positive indicators include greater global economic stability, a calming of the euro zone troubles and US fiscal problems, China’s strong commitment to manage its development towards a market-driven economy, as well as increasing confidence and focus on growth in both the mature and emerging economies."
Institutional investors, including private equity houses, sovereign investors and other financial investors, have been active in seeking opportunities in the resurgent developed markets. Private equity activity in Europe remains subdued although there is an increasing interest in Southern Europe. Near-record levels of uninvested 'dry powder' are likely to drive activity this year.
The strengthening performance of equity capital markets in the US and more recently in Europe is improving boardroom confidence, which along with the availability of relatively cheap debt should encourage more M&A activity in 2014. The opening up of the leveraged loan market and the availability of inexpensive high yield bond finance should continue to stoke M&A activity in 2014, particularly in the US and Europe. The use of high yield bonds to finance alternative deal structures, such as acquisitions of minority stakes, is expected to increase as are the levels of convertible bond issuance.
Trends in M&A challenges and risks
The Clifford Chance report looks at some of the key challenges and risks associated with cross-border M&A that are expected to feature high on the list of concerns for many corporates in 2014. A proliferation of global merger control laws mean that international M&A transactions are subject to ever more demanding and sophisticated reviews by regulators. Consequently, corporates today require clear and robust merger control strategies when undertaking any deal.
Sophisticated cyber attacks, corruption and perceived 'immoral' tax avoidance are among the new and evolving business risks that can easily damage corporate image and reputation. Boards need to invest in proper programs and strategies, from compliance to employee awareness to PR strategy preparation.
It is anticipated that shareholder activism around M&A deals – having reached new levels in the US in 2013 – will become more prevalent outside the US this year. Other stakeholders such as politicians, employees and the media are also becoming increasingly influential on deal outcomes.
Defining and communicating a company's strategic and financial message is key in dealing with activist investors as traditional legal defensive measures may no longer be the best response.
"On a more cautious note, there are certainly possible counter-balances to a pick-up in 2014 – the effects of the wind-down of quantitative easing, potentially dangerous asset ‘bubbles’ caused by the low interest rate environment, the longer term apparent reluctance of businesses to commit to capital investment and the forthcoming US debt ceiling deadlines, to name a few. Our clients continue to focus on achieving and demonstrating stakeholder value and remain risk averse with compliance and reputational issues high on the agenda in any transaction," Layton added.