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M&A: Pause for Breath or Plateau?

First quarter 2016 M&A remains strong but sees lower volumes and a significant drop in market performance.

The number of M&A deals completed* in the first quarter of 2016 was the lowest for two years according to Willis Towers Watson’s Quarterly Deal Performance Monitor (QDPM). The research, run in partnership with Cass Business School, shows that despite the fall in completed deals over $100m this quarter (174) compared to 233 in Q1 2015 (and 307 in Q4 2015), financial outperformance for companies completing M&A deals remains positive at 2.6 percentage points (pp) above the MSCI World Index. However, this is still significantly below the three-year rolling average of 5.8pp, and last year’s Q1 figures of 3.2pp.

A regional breakdown of M&A deals shows Asian acquirers have maintained the top spot in the performance league, with their outperformance of 22.9pp above their regional index. Acquirers from Europe outperformed by 5.5pp above their regional index, but have declined in the last two quarters, and are followed by North American acquirers which underperformed their index at -3.1pp. This is the first time North American acquirers have underperformed for two consecutive quarters since the same period in 2012.

Steve Allan, Human Capital M&A Practice Leader (EMEA) at Willis Towers Watson, said: “North America’s underperformance could be the sneeze that starts a worldwide M&A cold, however it could be just a regional phenomenon. The research shows an apparent correlation between US election years and M&A underperformance in the first two quarters; this having also occurred in both 2012 and 2008. Deal completion volumes traditionally drop off in the first quarter of the year so it is no surprise that we are seeing a drop from last year’s record levels. It is therefore an open question whether the drop in volumes and the drop in North American performance figures signals a true downturn in the M&A market performance, or just a reflection of the uncertainty currently seen in the region and where we are in the annual deal cycle.”

According to the research, cross-border, cross-regional and cross-sector deals outperformed the index** by 4.9pp, 4.9pp and 3.3pp respectively compared to domestic, intra-regional and intra-sector outperformance of 0.4pp, 1.7pp and 2.6pp respectively. In addition, quick deals in Q1 2016 underperformed compared to Q1 2015, whilst the outperformance of slow deals nearly doubled from 3.2pp Q1 2015 to 5.9pp this quarter.

Steve Allan said: “The outperformance of the cross-sector, cross-border and cross-regional deals compared to domestic deals, shows that those prepared to be bold are still reaping the rewards. But quick deals, traditionally those that are domestic or intra sector, creeping into negative performance could serve as a warning sign for those looking for industry consolidation opportunities.” According to the QDPM research, the number of mega-deals (over $10 billion) is up in Q1 2016 with six deals completed compared to four in Q1 2015, an all-time high for any first quarter since our analysis began in 2008.

Steve Allan said: “Mega deal M&A activity has increased unabated with deals closing despite the economic turmoil. But as deal volume overall decreases, it will be interesting to see if the drop in smaller deals is a leading indicator that we are reaching the crest of the M&A wave. While M&A activity remains high, it is too early to say if we have just paused for breath before an upturn in Q2 or if we have reached a plateau in activity and are at a turning point. Either way with M&A deals still outperforming the world index, acquisitions are likely to remain an attractive growth strategy for many companies in the year to come.”

www.willistowerswatson.com

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