Wachtell Lipton: Mergers & Acquisitions 2016

By Wachtell Lipton

2015 was a record year for M&A.  Global M&A volume hit an all-time high of over $5 trillion, surpassing the previous record of $4.6 trillion set in 2007.  U.S. M&A made up nearly 50% of the total.  The “mega-deal” made a big comeback, with a record 69 deals over $10 billion, and 10 deals over $50 billion, including two of the largest on record: Pfizer’s $160 billion agreement to acquire Allergan and Anheuser-Busch InBev’s $117 billion bid for SABMiller.  Cross-border M&A reached $1.56 trillion in 2015, the second highest volume ever.

A number of factors provided directors and officers with confidence to pursue large, and frequently transformative, merger transactions in 2015.  The economic outlook had become more stable, particularly in the United States.  Many companies had trimmed costs in the years following the financial crisis, but still faced challenges generating organic revenue growth.  M&A offered a powerful lever for value creation through synergies.  In a number of cases, the price of a buyer’s stock rose on announcement of an acquisition, as investors rewarded transactions with strong commercial logic, bucking historical trends.  Equity prices in 2015 were strong, if flat, providing companies with valuable acquisition currency.  For at least the first half of the year, strong appetite from debt investors (particularly for quality credits) and low interest rates enabled acquirors to obtain financing on attractive terms.

Industry trends also played a significant role in M&A activity in 2015.  There was consolidation in pharmaceuticals (including the pending Pfizer-Allergan transaction and AbbVie’s $21 billion acquisition of Pharmacyclics), technology (including Dell’s pending $67 billion acquisition of EMC and Avago’s $37 billion acquisition of Broadcom), insurance (including Anthem’s pending $54 billion acquisition of Cigna, Aetna’s pending $37 billion acquisition of Humana and ACE’s $28 billion acquisition of Chubb), and oil and gas (including Energy Transfer Equity’s pending $38 billion combination with Williams Companies and Royal Dutch Shell’s pending $70 billion acquisition of BG Group).

Looking ahead, as energy and commodity markets plumb lows, equity markets have become volatile, China and Brazil slump, Europe splinters, and debt markets look increasingly shaky, one may well wonder if M&A activity in 2016 will be less robust than in 2015.  Although many of the factors that drove activity in 2015 continue to be present, volatility impairs the confidence essential to large, strategic M&A transactions, even though it may also create opportunities.  It is difficult to imagine M&A activity in 2016 surpassing 2015 levels, but there are signs of continuing M&A dealmaking, even amidst the current turmoil.

Below, we review some trends that we expect to continue in 2016.

Hostile and Unsolicited M&A

Hostile and unsolicited M&A have increased dramatically in recent years, from $145 billion of bids, representing 5% of total M&A volume, in 2013 to $563 billion of bids, representing 11% of total volume, in 2015.  Notable recent bids include 21^stCentury Fox’s $80 billion offer for Time Warner, which was ultimately withdrawn; Cigna’s bid for Anthem, resulting in an agreed $54 billion merger; Mylan’s $35 billion bid for Perrigo, which was defeated, and Teva’s $40 billion bid for Mylan, which was ultimately withdrawn; DISH Network’s $26 billion bid for Sprint Nextel, which was ultimately withdrawn; and Energy Transfer Equity’s bid for Williams Companies, resulting in an agreed $38 billion combination.

To continue reading, please click here.