Mega Mergers Hit Record High in 2016

May 25, 2016 Updated: June 1, 2016

It is another exciting year for mergers and acquisitions (M&A), especially for deals with blockbuster price tags. Transactions worth at least $10 billion hit a record level in the first few months of 2016, according to a report by PitchBook Platform, an M&A database.

The value of mega-deals reached a total of $371 billion worldwide with 13 deals closed in 2016 so far. The first quarter of 2016 surpassed the deal value of each quarter since 2012.

Mega deals (worth at least $10 billion) by year. (PitchBook Platform)
Mega deals (worth at least $10 billion) by year. (PitchBook Platform)

“Not even five months in, this year’s total value in $10 billion+ M&A is already 77 percent of what was recorded in all of 2015—a year that had set records for this upper echelon of transaction sizes,” stated the report.

Two of the deals closed recently were by Charter Communications (NASDAQ: CHTR) which acquired both Time Warner Cable and Bright House Networks for more than $70 billion in total. Both transactions closed in May 2016.

And this year is on pace to be another busy one for blockbuster deals: German drug and chemicals company Bayer AG (ETR: BAYN) offered $62 billion to buy U.S. crops and seeds company Monsanto (NYSE: MON) on May 23. The proposed buyout would create a giant seed and farm chemical company and it is the largest foreign corporate takeover effort ever by a German company, according to a Wall Street Journal report.

M&A deals worth at least $10 billion by quarter. (PitchBook Platform)
M&A deals worth at least $10 billion by quarter. (PitchBook Platform)

“The mega deal-making boom has several drivers. Top of the list are historically low-interest rates that have allowed for cheap borrowing to fund large deals,” wrote Brian Hwang, director at Intralinks in his blog. Companies fueled their acquisitions using high leverage and by aggressively tapping the high-yield bond market.

In addition, companies are sitting on a huge cash pile. Businesses had more than $6 trillion in accumulated cash reserves globally by the end of 2015, according to a report by JPMorgan. This provides corporate executives the firepower to buy other companies and improve earnings and even engage in so-called hostile takeovers to get rid of their cash before they come under pressure to return it to shareholders.

An economic slowdown in China has stalled revenue growth at many large corporations. “With many U.S. and European companies suffering from a lack of revenue growth, transformational deals are seen as a new source of higher earnings, especially in sectors such as pharmaceuticals, consumer products, and telecoms,” said Hwang.

Five recent blockbuster M&A deals. (PitchBook Platform)
Five recent blockbuster M&A deals. (PitchBook Platform)

Some of the blockbuster M&A deals in the past, especially in the healthcare sector, were driven by the controversial tax inversion, which allowed U.S. companies to re-domicile in jurisdictions with lower tax rates. However, the new tax inversion regulations announced on April 4 by the U.S. Treasury have blocked the inversion route for U.S. companies.  

New York-based Pfizer walked away from its proposed $160 billion deal with Ireland-based Allergan due to the recent regulations.

However, pharmaceutical companies are still motivated to do acquisitions. Narrowing opportunities for high-growth pharmaceutical products and increased competition are still driving acquisitions in the sector, according to experts.

“The conditions are still in place for the mega-deal trend to continue. … Overall economic growth and corporate organic growth remain subdued so companies seeking to boost their revenue growth in order to justify high market valuations have to do it via M&A,” said Hwang.

Follow Emel on Twitter: @mlakan