Pfizer's attempted takeover of AstraZeneca hit the headlines recently, but was the bid a sign of a wider upturn in M&A activity, and what role are investment banks playing in making deals happen?
US drugs giant Pfizer’s recent attempted takeover of UK pharmaceutical firm AstraZeneca drew a lot of negative press, but beyond the failed £69bn bid, there is more positive news for the mergers and acquisitions (M&A) sector.
According to EY, the value of UK M&A conducted in first half of 2014 hit US$183bn, a 108% increase on 2013, and the sector’s highest value since 2008. The latest Deloitte M&A Index, meanwhile, expects global deal volumes to exceed 8,000 by the end of Q3 2014, up 9% over the same period in 2013.
Iain Macmillan, Head of M&A at Deloitte, attributes the increase to strong economic results and renewed market confidence. “We believe the M&A market is on an upward trajectory as a number of hostile bids suggest that companies are looking to get deals done,” says Macmillan.
"I think investment banks have got to be more proactive than they have been in the past"
It is a view supported by Debbie Clarke, Chartered MCSI, Partner at Chantrey Vellacott and Chairman of the CISI’s Corporate Finance Professional Forum Committee. “There is a greater appetite for deals, with people feeling much more confident about market conditions,” says Clarke. “A lot of board time goes into a transaction, so you want to be sure it is going to go through to completion.”
High equity valuations, low interest rates and cheap debt, as well as strong cash piles, provide a highly favourable environment for deal making, believes Jon Hughes, EY's Head of Transaction Advisory Services, UK & Ireland. “What we are experiencing is a steady, measured and sensible level of M&A by UK deal makers,” says Hughes.
Following the Pfizer-AstraZeneca saga, Business Secretary Vince Cable recently announced he will tighten the rules relating to attempted takeovers by foreign companies.
Cable wants any regime overseeing takeovers to include possible fines for firms which renege on promises made during the deal. New laws to strengthen the “national interest test” could also be introduced. Critics of the bid for AstraZeneca claimed Pfizer’s commitments to maintaining research and jobs in the UK were vague and insufficient.
Chantrey Vellacott’s Debbie Clarke welcomes efforts to protect UK businesses, but believes the City Code on Takeovers and Mergers – administered by the independent Panel on Takeovers and Mergers – is doing a good job of this already.
Clarke reckons, however, that the Code could be extended to help ensure foreign firms are committed to a takeover and are not just on a “fishing expedition”. “Now, whether the Code does that by demanding a financial commitment, or another commitment that stops a firm from doing other acquisitions for a period of time, I don’t know,” she says. “But additional legislation might keep companies on the straight and narrow.”He warns, however, that these ideal conditions for transformative deals will not last forever. “Interest rates will rise, equity values will move and the competition for high-quality assets will only become more intense as private equity activity increases,” he forecasts. “Leading companies will look to do smart and strategic M&A before the current deal climate changes so we can expect more large, headline-grabbing acquisitions to come.”
Atlantic crossingAccording to Deloitte, current M&A activity is being driven by a boom in US deal making. Europe is a key target for US companies, which have spent $89bn on European companies so far this year. Clarke explains the trend. “When US companies break into a market and do it from a standing start, there’s a pretty high cost outlay. They have realised they can make better gains by acquiring a well-established business in Europe.
“They look at countries which give them a platform into the rest of Europe and, typically, the UK is high on that list. They don’t just see it as investing in one country, but investing in the whole territory.”
Advisory roleWith M&A activity involving UK firms on the increase, what is the role of investment banks in pushing through deals – and should banks be doing more? “I think investment banks have got to be more proactive than they have been in the past – and I do think many of them have been more proactive of late,” says Clarke. “They do not necessarily need to push through deals, but they have to make sure they are providing enough advice to their clients and covering off all the possible ways a deal could be done.”
This approach requires imagination, adds Clarke. “In the heyday prior to the recession, people were more willing to be ingenious about how they structured a transaction, making sure it was an attractive transaction not just for the acquirer, but for the target as well,” recalls Clarke, who has seen signs of a return to that approach. “Take the Pfizer-AstraZeneca attempted deal: it wasn’t a friendly transaction, but Pfizer were putting extra elements into the deal to try and make it more attractive; they just didn’t quite go far enough to make it work.”
Clarke is confident that the role of investment banks in such transactions is not under threat from big players handling their own M&A work. She says: “I think the big players have always had in-house teams, but what most UK Plcs don’t have is a large M&A team. They have an in-house team that project manages the transaction, but it won’t be able to do the whole transaction, nor does it want to.
“The finance director is often the person whom the head of M&A reports to. The head of M&A often wants to have an independent view they can put to the board to help them make an informed decision on a deal – and investment banks and other advisers can provide that independent view. If Plcs choose to rely entirely on their own M&A team, they don’t have that viewpoint, so I think most PLCs prefer a mixture of having someone in-house to make sure deals are running to their timetable and being able to call in independent advice from outside.”
With M&A activity on the rise once more, investment banks are increasingly likely to be called upon to offer that expert advice – and help companies ensure their M&A activities make headlines for the right reasons.