 "A standout year for deals, in volume and complexity")
Of all the ways to describe mergers and acquisitions in 2015, "plain vanilla" is not one of them.
Last year was one for the record books, generating $4.7 trillion in announced deals, with the highest percentage ever derived from those valued at more than $5 billion, according to data compiled by Thomson Reuters.
Unlike boom years past, however, this one was characterised by dozens of complex and creative financial structures. Drug makers Pfizer and Allergan sought to combine - effectively through a tax-inversion deal, lowering Pfizer's tax rate. Dow Chemical and DuPont, two storied chemical giants, agreed to merge into a $130 billion behemoth with the explicit intent to be separated into three companies in a few years.
Other deals, such as Anheuser-Busch InBev's $104 billion acquisition of rival brewer SABMiller required multiple divestitures before any chance of regulatory approval. Rare financial instruments such as tracking stocks and contingent value rights, both creative ways for adding value for the seller, also appeared in takeovers.
Boardrooms were flooded with so much confidence that executives were willing to stretch beyond the textbook-style acquisition - Company A buys Company B - to get deals done. Financing was cheap because of low interest rates and growth was generally slow, so colossal companies sought purchases as a way to expand.
That shift coincided with a transformation among activist investors, many of whom recommended sweeping transactions instead of the traditional stock buyback or board seat for themselves. Pressure from activists, or the potential to become the target of activists, encouraged companies to explore all their options and make moves.
"Boards have become much more educated and diligent. They understand the options that are available to them more than any point in my career," said Vito Sperduto, the head of United States mergers and acquisitions at RBC Capital Markets, who has been in the industry for about 25 years. "As a result, they're better able to consider complex transactions, and that's why you're seeing more of them."
Investors also helped open the merger and acquisition floodgates, sending stock prices of the acquiring companies higher when deals were announced. On average, buyers' shares gained 0.5 per cent for deals over $1 billion, according to Thomson Reuters. Traditionally, they have tended to decline.
"Shareholders have been more receptive to M.&A. transactions because they have provided hope for growth," said Michael Carr, the global co-head of the mergers and acquisition group at Goldman Sachs. "This acceptance has given companies the opportunity to find creative ways to generate value."
But as deals became more complex in the second half of the year, investors became more discerning. In the first half of 2015, 68 per cent of announcements lifted the acquirer's stock; that figure fell to 36 per cent in the last six months, according to Thomson Reuters.
"The earlier deals with large, positive investor reactions were some of the most obvious deals to get done, where the synergies were well understood and highly tangible," said Chris Ventresca, the global co-head of mergers and acquisitions at JPMorgan Chase. "As some buyers extended beyond their core business lines and/or premiums paid got too high relative to synergies, investors became less comfortable bidding that buyer's stock up."
Previous booms were met with more of a playbook. The uptick in 1999 was composed mostly of one sector: technology. In 2007, the surge was the result of enormous leveraged buyouts. Neither of those periods was met with large amounts of structure within deals, bankers and lawyers recall. The deal market surpassed records last year. The $4.7 trillion worth of mergers and acquisitions was a 42 per cent increase from 2014, Thomson Reuters data showed. The number of deals conducted last year gained a mere 0.2 per cent from 2014, according to the data. That showed how skewed the market was toward bigger deals.
Investors started becoming more comfortable with complexity as tax-inversion deals surged over the last few years. Despite a legislative backlash over the tactic - by which an American company acquires a foreign one and reincorporates abroad to reduce its tax bill - many investors understood and applauded the strategy.
In November, Pfizer agreed to a $152 billion deal with Allergan, the biggest transaction over the last 15 years. Because Allergan, the maker of Botox, is based in Dublin, the deal allowed Pfizer to shed its American citizenship, relocate its headquarters and pay a lower tax rate, especially on cash earned abroad. By all intents, the transaction achieves the same outcome as an inversion, even though Allergan was technically the buyer, despite being much smaller.
To make matters more complex, the companies are already considering splitting into two businesses, one focused on faster-growing innovative drugs and another on more-mature treatments. Pfizer said it would decide on the separation by 2018.
Private equity firms also sought a bit more creativity, as valuations for potential buyouts remained high. Firms pursued other avenues to deploy the almost $500 billion they have in capital.
Two years after Michael S. Dell took his namesake company private, the computer maker and its financial backer, Silver Lake, acquired EMC for about $67 billion in October. Crucial to the deal was using a so-called tracking stock for VMware, the publicly traded software company owned mostly by EMC. That instrument, which mimics the publicly traded stock without traditional shareholder rights, saved Dell and Silver Lake billions of dollars' worth of additional financing, people briefed on the discussions said at the time.
Some private equity firms opted for private investment in public equities, or PIPEs, in lieu of large leveraged buyouts. Most recently, the private equity firm Cerberus took Avon's North American unit private while infusing $435 million in equity into the parent company.
But all of this complexity can be risky from an execution standpoint. DuPont and Dow have traded lower since news broke of their merger, as investors were concerned about potential pressure on the business from combining their companies and then splitting them up later.
There's also the risk that some of the large deals will not be able to find the concessions necessary to appease regulators or will be thwarted by the Justice Department altogether.
The Federal Trade Commission filed a suit last month to block the $6.3 billion merger between Staples and Office Depot. Two oil-field services companies, Halliburton and Baker Hughes, which agreed a year ago to a $35 billion deal, have pushed back the deadline for approval while they find new ways to mollify regulators.
For the last several years, regulators have been willing to "push the envelope a bit more in terms of enforcement," but it has not slowed down deal activity, said Stephen F. Arcano, a partner at Skadden, Arps, Slate, Meagher & Flom, who leads the firm's mergers and acquisitions group.
SABMiller agreed to divest its stake in MillerCoors, worth $12 billion, to Molson Coors, before its acquisition by Anheuser-Busch InBev. Analysts have said that the two companies may need to make similar concessions with interests in China and other markets to appease regulators.
Amid such an abundant year in deal-making, many of the top few companies in each industry have combined. That could cause their competitors to continue to seek unique and creative methods for deals of their own to avoid any regulatory tangle.
Most bankers and lawyers agree: 2016 will continue to be busy.
"People are being more thoughtful in trying to solve the objectives of both sides," said Robin Rankin, the global co-head of mergers and acquisitions at Credit Suisse. "They're willing to do so through structure or governance or other mechanisms, and I think that theme will continue."
Last year was one for the record books, generating $4.7 trillion in announced deals, with the highest percentage ever derived from those valued at more than $5 billion, according to data compiled by Thomson Reuters.
Unlike boom years past, however, this one was characterised by dozens of complex and creative financial structures. Drug makers Pfizer and Allergan sought to combine - effectively through a tax-inversion deal, lowering Pfizer's tax rate. Dow Chemical and DuPont, two storied chemical giants, agreed to merge into a $130 billion behemoth with the explicit intent to be separated into three companies in a few years.
Other deals, such as Anheuser-Busch InBev's $104 billion acquisition of rival brewer SABMiller required multiple divestitures before any chance of regulatory approval. Rare financial instruments such as tracking stocks and contingent value rights, both creative ways for adding value for the seller, also appeared in takeovers.
Boardrooms were flooded with so much confidence that executives were willing to stretch beyond the textbook-style acquisition - Company A buys Company B - to get deals done. Financing was cheap because of low interest rates and growth was generally slow, so colossal companies sought purchases as a way to expand.
That shift coincided with a transformation among activist investors, many of whom recommended sweeping transactions instead of the traditional stock buyback or board seat for themselves. Pressure from activists, or the potential to become the target of activists, encouraged companies to explore all their options and make moves.
"Boards have become much more educated and diligent. They understand the options that are available to them more than any point in my career," said Vito Sperduto, the head of United States mergers and acquisitions at RBC Capital Markets, who has been in the industry for about 25 years. "As a result, they're better able to consider complex transactions, and that's why you're seeing more of them."
Investors also helped open the merger and acquisition floodgates, sending stock prices of the acquiring companies higher when deals were announced. On average, buyers' shares gained 0.5 per cent for deals over $1 billion, according to Thomson Reuters. Traditionally, they have tended to decline.
"Shareholders have been more receptive to M.&A. transactions because they have provided hope for growth," said Michael Carr, the global co-head of the mergers and acquisition group at Goldman Sachs. "This acceptance has given companies the opportunity to find creative ways to generate value."
But as deals became more complex in the second half of the year, investors became more discerning. In the first half of 2015, 68 per cent of announcements lifted the acquirer's stock; that figure fell to 36 per cent in the last six months, according to Thomson Reuters.
"The earlier deals with large, positive investor reactions were some of the most obvious deals to get done, where the synergies were well understood and highly tangible," said Chris Ventresca, the global co-head of mergers and acquisitions at JPMorgan Chase. "As some buyers extended beyond their core business lines and/or premiums paid got too high relative to synergies, investors became less comfortable bidding that buyer's stock up."
Previous booms were met with more of a playbook. The uptick in 1999 was composed mostly of one sector: technology. In 2007, the surge was the result of enormous leveraged buyouts. Neither of those periods was met with large amounts of structure within deals, bankers and lawyers recall. The deal market surpassed records last year. The $4.7 trillion worth of mergers and acquisitions was a 42 per cent increase from 2014, Thomson Reuters data showed. The number of deals conducted last year gained a mere 0.2 per cent from 2014, according to the data. That showed how skewed the market was toward bigger deals.
Investors started becoming more comfortable with complexity as tax-inversion deals surged over the last few years. Despite a legislative backlash over the tactic - by which an American company acquires a foreign one and reincorporates abroad to reduce its tax bill - many investors understood and applauded the strategy.
In November, Pfizer agreed to a $152 billion deal with Allergan, the biggest transaction over the last 15 years. Because Allergan, the maker of Botox, is based in Dublin, the deal allowed Pfizer to shed its American citizenship, relocate its headquarters and pay a lower tax rate, especially on cash earned abroad. By all intents, the transaction achieves the same outcome as an inversion, even though Allergan was technically the buyer, despite being much smaller.
To make matters more complex, the companies are already considering splitting into two businesses, one focused on faster-growing innovative drugs and another on more-mature treatments. Pfizer said it would decide on the separation by 2018.
Private equity firms also sought a bit more creativity, as valuations for potential buyouts remained high. Firms pursued other avenues to deploy the almost $500 billion they have in capital.
Two years after Michael S. Dell took his namesake company private, the computer maker and its financial backer, Silver Lake, acquired EMC for about $67 billion in October. Crucial to the deal was using a so-called tracking stock for VMware, the publicly traded software company owned mostly by EMC. That instrument, which mimics the publicly traded stock without traditional shareholder rights, saved Dell and Silver Lake billions of dollars' worth of additional financing, people briefed on the discussions said at the time.
Some private equity firms opted for private investment in public equities, or PIPEs, in lieu of large leveraged buyouts. Most recently, the private equity firm Cerberus took Avon's North American unit private while infusing $435 million in equity into the parent company.
But all of this complexity can be risky from an execution standpoint. DuPont and Dow have traded lower since news broke of their merger, as investors were concerned about potential pressure on the business from combining their companies and then splitting them up later.
There's also the risk that some of the large deals will not be able to find the concessions necessary to appease regulators or will be thwarted by the Justice Department altogether.
The Federal Trade Commission filed a suit last month to block the $6.3 billion merger between Staples and Office Depot. Two oil-field services companies, Halliburton and Baker Hughes, which agreed a year ago to a $35 billion deal, have pushed back the deadline for approval while they find new ways to mollify regulators.
For the last several years, regulators have been willing to "push the envelope a bit more in terms of enforcement," but it has not slowed down deal activity, said Stephen F. Arcano, a partner at Skadden, Arps, Slate, Meagher & Flom, who leads the firm's mergers and acquisitions group.
SABMiller agreed to divest its stake in MillerCoors, worth $12 billion, to Molson Coors, before its acquisition by Anheuser-Busch InBev. Analysts have said that the two companies may need to make similar concessions with interests in China and other markets to appease regulators.
Amid such an abundant year in deal-making, many of the top few companies in each industry have combined. That could cause their competitors to continue to seek unique and creative methods for deals of their own to avoid any regulatory tangle.
Most bankers and lawyers agree: 2016 will continue to be busy.
"People are being more thoughtful in trying to solve the objectives of both sides," said Robin Rankin, the global co-head of mergers and acquisitions at Credit Suisse. "They're willing to do so through structure or governance or other mechanisms, and I think that theme will continue."
©2016 The New York Times News Service