The fierce pace of M&A activity in 2015 looks unlikely to be repeated next year as global economic uncertainty and fears of rising borrowing costs spook dealmakers.
This year is on track to set a new record for mergers and acquisitions, with more than $1.8trn (£1.16trn) of global deals announced in the first six months, according to the latest Deloitte M&A index. This is a 22 per cent increase on the same period in 2014.
However, technology data provider Intralinks says deals rose 5.6 per cent in the third quarter of 2015, compared with a 9 per cent increase in the previous quarter. For the first three months of 2016 the firm forecasts M&A activity will grow by between 6 and 8 per cent year-on-year.
AJ Bell investment director Russ Mould says interest rates will probably go up and credit spreads widen in 2016, increasing the cost of new debt for companies with already weak balance sheets.
He says: “It is expensive for companies to buy even now that interest rates are low. Also, dividend cover is becoming thinner and there is more pressure from shareholders.”
Hargreaves Lansdown head of passive investments Adam Laird concedes that next year is not going to be “as good as 2015” for deals, but argues M&A activity will not judder to a halt.
Axa Wealth head of investing Adrian Lowcock says although uncertainties over China are eroding corporate confidence, companies struggling to generate organic growth will still be keen to merge.
And Old Mutual Global Investors Equity Income fund manager Steph-en Message argues that while global growth is slowing, company bosses are not as concerned as they were after the financial crisis.
He says: “A few years ago CEOs were still alarmed because, coming out of the global financial crisis, companies were not investing and were only giving money back to shareholders.Now you are going to see more corporate confidence.”
Aviva Investors head of UK equities Trevor Green is also convinced M&A deals will not slow significantly. “When companies go to do an acquisition they do due diligence in advance. So what happens to China or the US doesn’t really matter.
“GDP forecasts going down aren’t important at a company level as long as their balance sheet is strong.”
Rathbones chief investment officer Julian Chillingworth says the key to any M&A deal is the impact it will have on companies’ long-term growth plans, meaning short-term macro-economic factors may not necessarily affect the market.
He says: “Inorganic growth can sometimes mean companies trying to grow their bottom line even if the economy is peaking. This can be dilutive to the shareholder as there is less emphasis on the cash business.”
Topping the M&A activity in the first nine months of 2015 were brewer Anheuser-Bush InBev’s record £76.7bn acquisition of South African rival SABMiller and Royal Dutch Shell’s offer to acquire BG Group for £54.6bn, a deal due to be completed early next year.
Telecoms giant BT also agreed final terms to acquire mobile network operator EE for £12.5bn in June.
However, as Green points out, M&A does not just involve large firms. “It is not just about the big companies – small and mid-caps did a number of deals. For example, UK communication firm Next 15 acquired Encore Digital Media.”
Green also holds BG, packaging firm DS Smith – which acquired Duropack in June 2015 – and property website Zoopla, which purchased price comparison website uSwitch in April. In addition, he has a large position in Aviva, which recently completed a deal to buy rival insurer Friends Life.
According to M&As intelligence service Mergermarket, energy, mining and utilities dominated the deals completed in the first nine months of 2015, representing £23.2bn.
Beaufort Investment chief investment officer Stephen Watson says “where money is cheap” and growth is hard to come by, deals will continue in the energy sector.
He says: “Shell and BG have been lovers for 25 years. The deal only happened because Shell’s share price fell. I can see more deals coming from mining as well as steel, which is in distress.”
Mould says healthcare is still “the hottest sector” for M&As next year. “Healthcare companies are looking to replenish their pipelines. Just look at AstraZeneca, which attracted a £70bn bid from Pfizer last year.”
Meanwhile, Message says technology has seen “a large number of deals” and will continue to consolidate over the next 12 months.