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By Lauren Hirsch and Greg Roumeliotis
Sept 29 The value of announced mergers and
acquisitions (M&A) worldwide fell 27 percent year-on-year to
$753 billion in the third quarter of 2016, as apprehension among
corporate executives about overpaying prevented a repeat of last
year's deal-making frenzy.
The preliminary Thomson Reuters M&A data shows the euphoria
that drove merger mania in 2015 has subsided. While M&A activity
remains robust, dealmakers said companies are being more
selective in their decisions to do deals.
"With price-to-earnings multiples at historic highs, deals
are more likely to happen when there is lower growth in a
sector, high potential for synergies, and potential acquirers
enjoy a healthy stock price," said Paul Parker, chairman of
global M&A at Goldman Sachs Group Inc.
The stock market is hovering at record highs, while the S&P
500 Index's price-to-earnings ratio is at its highest level
since the 2008 financial crisis. Combined with uncertainty over
the U.S. Federal Reserve's policy on interest rates, companies
have become more cautious when it comes to M&A.
"It does get down to high prices. I think most of last year
and the two years prior, even if it was priced high it was OK...
Now, it had better be for a good growth profile," said
Marc-Anthony Hourihan, co-head of M&A for the Americas at UBS
This year's largest deal so far was clinched in the third
quarter; German drug and crop chemical maker Bayer AG's
$66 billion takeover of U.S. seeds company Monsanto
Co is also the biggest all-cash deal on record.
Some of the other big deals this quarter included Enbridge
Inc's $28 billion acquisition of Spectra Energy Corp
to create the largest North American energy
infrastructure company, and Softbank Group Corp's $32
billion acquisition of British semiconductor maker ARM Holdings
"The strategic consolidation activity occurring has resulted
in many CEOs and boards across sectors saying 'I don't want to
be left out, I don't want to be the last mover, because then
there will be nothing left to do and I may be disadvantaged',"
said Patrick Ramsey, co-head of global M&A, Bank of America Corp
"This will continue to be a driver of both transformative
mergers and sizeable bolt-on acquisition activity," Ramsey
Another factor that has weighed on M&A this year, dealmakers
said, is the United States and several other countries flexing
their antitrust muscles and seeking to crack down on deals that
aid tax avoidance or risk harming national security.
An exception to the heightened price awareness is the
pharmaceutical sector. Drug companies continue to be willing to
pay high premiums to buy new products, rather than devote their
resources to risky drug development.
In August, Pfizer Inc announced a $14 billion deal
to acquire cancer drug maker Medivation Inc, at an 118
percent premium to Medivation's undisturbed share price.
"Valuations in pharmaceutical companies may not be
objectively attractive. You're just dealing with simple reality
that many companies need to fill the pipeline of products to
supplement what they are able to produce organically," said
Daniel Wolf, an M&A partner at law firm Kirkland & Ellis.
This quarter, the U.S. had its largest amount of inbound
global deals in more than a decade, led by buyers in Europe,
Canada and Asia, as the nation's economy continued to be
attractive despite its challenges.
In July, for example, French yogurt company Danone SA
said it would double the size of its U.S. business by
buying organic foods producer WhiteWave Foods Co for
$10.4 billion in its largest acquisition since 2007.
"Once-cautious executives are now looking for growth outside
their home market, partly because there is a certain degree of
frustration with the lack of economic growth in the region. That
makes it even more pressing to look for growth elsewhere and the
U.S. remains a logical destination," said Dietrich Becker, a
partner at investment bank Perella Weinberg Partners LP.
That said, Softbank's deal for ARM shows that some companies
have seen the turmoil created by Britain's vote to leave the
European Union as a buying opportunity.
Outbound M&A from China continues to be a key driver of
deals. China has accumulated $159 billion in outbound M&A so far
this year, topping 2015's full-year record of $107 billion.
(Reporting by Lauren Hirsch and Greg Roumeliotis in New York;
Additional reporting by Sophie Sassard in London; Editing by