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Building momentum: US M&A in 2016 I
II White & Case
M&A accelerates into 2017
Despite political uncertainty and subdued activity early in 2016, the US M&A market closed the year with a flourish. 2017 looks to be strong
After a slow start to 2016, US M&A activity recovered in the last quarter to close the year robustly. In the fourth quarter alone, US$483.6 billion worth of US M&A was announced, making it the highest quarterly total of the year. As a whole, H2 2016 value outstripped H1 value by 52 percent. Setting aside the blockbuster years of 2014 and 2015, 2016 ended up being one of the best for M&A since 2007. Confidence is high that 2017 will be another good year (and maybe even a great year) for dealmaking.
Donald Trump's election as US President has ushered in a pro-business agenda that is positive for M&A. Brexit has not impacted as much as people expected, and China's interest in M&A targets and ability to compete for those targets, on a global basis, is not likely to wane even in the face of potential capital, regulatory and protectionist headwinds.
There are, of course, challenges for dealmakers to navigate. Certain regulatory hurdles may be lowered in 2017, some may be raised. Protectionism may result in continuing scrutiny of certain inbound investments.
However, the conditions for strong M&A activity remain. There is lots of cash that corporates and private equity firms need to deploy. Interest rates are still low and stock markets are up. The steady but restrained economic growth has encouraged dealmakers to seek growth opportunities through combination.
If the new administration and Congress are able to implement a pro-business agenda, it will increase the ability of US companies to make acquisitions at home and abroad and increase the attractiveness of the US to non-US acquirers. We are very optimistic for 2017 dealmaking.
John Reiss Global Head of M&A, White & Case
Gregory Pryor Head of Americas M&A, White & Case
Building momentum: US M&A in 2016
US M&A bounces back after shaky start
US M&A in figures
Sector watch: Industries seek M&A to fend off pressure
In focus: Tech and M&A
AI M&A just got real
Private equity strikes as strategics lull
Four keys to US M&A success in 2017
US M&A bounces back after shaky start
A slow first half, regulatory activism and political uncertainty did not stop US M&A activity
W ith the uncertainty that defined 2016, expectations for the year may have been muted. However, despite the relatively slow deal activity across the first nine months of 2016, the US M&A market delivered another strong year following a string of bulge bracket deals in October and November.
In 2016, US M&A deal volume fell a bit to 5,084 deals from 5,293 in 2015. Deal value was down more substantially, from US$1.9 trillion in 2015 to US$1.5 trillion. Despite this yearly fall, US dealmaking on the whole was still high by historical standards.
October, in particular, saw a material uptick in big-ticket transactions, including AT&T's US$105 billion deal to acquire Time Warner and CenturyLink's US$34.5 billion takeover of Level 3 Communications.
Number of deals
US M&A 2011--2016
700,000 600,000 500,000 400,000
00 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Deal value (US$ million)
Top 10 US M&A deals
Announced date 22/10/2016 14/09/2016 21/11/2016
06/09/2016 11/01/2016 31/10/2016
28/04/2016 13/06/2016 29/07/2016
Completed Target company date
Time Warner Inc. Monsanto Company EnergyTransfer Partners L.P. Spectra Energy Corp 03/06/2016 Baxalta Inc. Level 3 Communications Inc Baker Hughes Incorporated 04/01/2017 St. Jude Medical Inc 08/12/2016 LinkedIn Corporation Energy Future Holdings Corporation
Target dominant sector
Media Chemicals and materials Energy
Target dominant country
Medical: Pharmaceuticals USA
Medical Services (other) Energy
USA USA USA
AT&T Inc. Bayer AG Sunoco Logistics Partners, L.P. Enbridge Inc. Shire Plc CenturyLink, Inc.
Baker Hughes, a GE Company Abbott Laboratories Microsoft Corporation NextEra Energy, Inc.
Bidder dominant Deal value country US$ million
Canada Ireland (Republic)
41,446 35,219 34,469
USA USA USA
29,850 25,514 18,400
Building momentum: US M&A in 2016 3
The CFIUS effect
The Committee on Foreign Investment in the United States (CFIUS), established to review the effect of deals by foreign buyers on US national security, was an influential player in M&A in 2016.
There were a couple of noteworthy deals that were abandoned in the wake of CFIUS objections. Philips NV called off the US$2.6 billion sale of its lighting components business Lumileds to a Chinese-led consortium after CFIUS said that it would recommend that the President of the United States block the transaction if the parties did not abandon the deal. President Obama subsequently blocked the acquisition of German-based chip equipment manufacturer Aixtron's US business by China's Fujian Grand Chip Investment Fund, which led to the parties terminating their overall US$547 million transaction. This was only the third time that a President has prohibited a transaction, and the first ever pre-closing Presidential block order.
"It has been a remarkable year," says Farhad Jalinous, a partner at White & Case. "CFIUS has confirmed what we have been seeing, which is that 2016 has been an extremely busy year for them. The number of filings have been at really high levels throughout the year. It sounds like there was even an acceleration in the number of filings towards the tail-end of the year."
Furthermore, Jalinous observes, there are indications that the CFIUS review process could be poised for some kind of update or revision. These include a new President who campaigned strongly on protecting US business, a number of letters from members of Congress requesting CFIUS attention and, in some cases, action regarding specific deals, and a recommendation from the US-China Economic and Security Review Commission to congress to modify the statute to give CFIUS additional powers to restrict certain inbound investments from China.
If any such modifications do come to pass, they would most likely require a statutory amendment, which could take years. "The last time that the statute was actually amended, it took a couple of years. That was the Foreign Investment and National Security Act of 2007," Jalinous says. "The modification to the statute does take some time and you have to keep in mind that the regulations under the updated statute then also need to be promulgated."
Jalinous believes, however, that the increase in the volume of deals CFIUS has to process will have the most significant impact on M&A in the year ahead.
"The formal CFIUS process is pretty much set by the statute and regulations, but the timing of some of the steps in the process, where CFIUS has discretion in how it processes material that has been submitted, has been impacted," Jalinous says. "Before the rigid timelines set in, there is the pre-filing phase where you submit a joint filing in draft to the Committee for them to review and provide feedback before you formally file. This process has become much more extensive and can now take weeks or in some cases longer. The time between a formal submission and the acceptance of a filing, which actually starts the clock, has also been prolonged. A lot of it is being driven by the sheer volume that is coming in and what the CFIUS staff have to manage."
Other countries have also been adopting and in some cases expanding procedures to review the national security implications of transactions impacting their jurisdictions. As a result, considering CFIUS-like processes in a variety of countries is becoming an integral part of multinational cross-border deal planning.
"More and more jurisdictions around the world are either setting up or strengthening their regulatory or statutory authorities for review of inbound foreign direct investments from a national security perspective," Jalinous says. "When we have a cross-border deal coming in from the Far East, for instance, we're not only doing a CFIUS analysis. We're doing a German analysis, French analysis, Italian analysis, Australian analysis, Canadian analysis, etc. based on where the target has assets. That is really the clear trend of these crossborder deals. These reviews may start with CFIUS, but it's becoming more of a global issue that needs to be addressed in multinational cross-border deals."
4 White & Case
According to Mergermarket, six of the ten largest deals in the US in 2016 were announced in or near Q4. In October alone, US$254.8 billion worth of US M&A was recorded. By 2016's end, H2 value had outstripped H1 by 52 percent.
"The last year was up and down a bit. We had a good quarter and then a not so good quarter, then a good quarter. But overall, it was a strong year for M&A," says John Reiss, global head of M&A at White & Case. "2016 went forward in the face of some uncertainty, but the uncertainty was always very temporary and quickly abated."
Pause for effect A number of factors contributed to weaker M&A data for the first three quarters. During 2016, stock prices of acquirers fell following deal announcements, suggesting that investors were reacting more cautiously to acquisitions in recent periods.
For example, pharma group Pfizer's US$183.7 billion agreement to acquire Allergan was called off after the US Treasury tightened up rules on so-called tax inversion deals. Oil groups Halliburton and Baker Hughes abandoned a US$37.2 billion merger after opposition from antitrust authorities. Additionally, the emergence of regulatory activism impacted the progress of certain foreign investments. For instance, the Committee on Foreign Investment in the United States (CFIUS) objected to Philips' US$2.6 billion sale of its lighting components business to a Chinese-led consortium as well as chip manufacturer Aixtron's US$547 million sale to China's Fujian Grand Chip Investment Fund (FCG).
Deal drivers Yet despite a somewhat sluggish year for deals through Q3 and uncertainty following Donald Trump's victory in the Presidential election, M&A boomed in the final quarter of the year.
US stocks have climbed since the vote, with the S&P 500 up 7.4 percent in the month since the election. Markets appear to have shrugged off concerns about cross-border trade and responded positively to Trump's plans to increase growth by cutting taxes, investing in infrastructure and lowering the tax burden on corporate cash repatriated to the US from abroad.
Grand Central, NYC
"Trump's platform is extraordinarily pro-business, from the rolling back of regulation to fiscal stimulus to tax changes, both in terms of tax rates and repatriation opportunities. Those policies create a lot of confidence, and confidence helps the stock market and helps M&A," says Reiss. (For more on Trump, see page 8).
In addition to strong stock markets, steady economic growth in the US has also given dealmakers the confidence to continue pursuing transactions despite political change, with the World Bank forecasting GDP growth of 1.9 percent for 2016, rising to 2.2 percent in 2017. By contrast, GDP growth in the Euro Area is expected to stay at 1.9 percent in 2017.
The key strategic drivers for steady M&A--supplementing
low organic growth with deals, improving margins through synergy, and cheap financing and confidence--remain firmly in place for all corporates.
"The fundamental drivers energizing the US M&A market in the past two years remain in place. If the new administration and Congress successfully executes its pro-business agenda, and doesn't otherwise create unnecessary uncertainty, we can expect US M&A activity to continue its robust pace," says Gregory Pryor, US head of M&A at White & Case.
Consolidation stations The strategic importance of M&A is clear to see in some of the biggest deals in the US in 2016. AT&T's US$105 billion deal to acquire Time
Warner is the latest transaction in the TMT sector, where the rapid convergence of telephony, wireless, broadband and television has made M&A essential as companies seek to acquire spectrum and meet customer demands.
German chemical giant Bayer AG's US$63.4 billion deal for US-based Monsanto, meanwhile, is driven by consolidation in the chemicals industry where there is a rush to build scale and secure revenues in a low-growth sector.
Key deals include Canadian pipeline business Enbridge acquiring US counterpart Spectra Energy Group for US$41.4 billion, as well as Great Plains Energy's US$12.1 billion takeover of Westar Energy and Fortis' US$11.3 billion acquisition of ITC.
Building momentum: US M&A in 2016 5
Home and away The year's largest deals demonstrate the importance of cross-border activity involving the US. Indeed, inbound dealmaking into the US has held steady through 2016, with volumes increasing to 970 deals from 924 deals in 2015. Inbound deal value rose marginally from US$444.1 billion in 2015 to US$451.6 billion this year, and Q3 deal value of US$190.8 billion represents the highest quarterly inbound deal value in over five years.
Deals such as Bayer AG's play for Monsanto and Irish pharma group Shire's US$35.2 billion acquisition of Baxalta Corp show that the US remains a highly attractive destination for overseas
M&A investors. This is especially pertinent given a cooling economy in China, unattractive risk-adjusted returns in other emerging markets and uncertainty in Europe-- both in terms of Brexit and the impending crunch elections in major economies such as France, Germany and the Netherlands.
Neighboring Canada was the most active inbound investor in the US, leading in volume and value with 155 deals worth US$110.6 billion in 2016. Notable, high-value Canadian deals included the aforementioned Enbridge and Fortis acquisitions.
The UK was ranked second in terms of volume, with 141 transactions, but was only fifth in the value rankings
Percentage decline in US M&A deal
volume year-on-year, from 5,293 in 2015 to 5,084 in 2016
Top 10 inbound bidders by deal volume 2016
Canada 155 deals
United Kingdom 141 deals
Japan 91 deals
China 79 deals
France 64 deals
Germany 62 deals
Switzerland 49 deals
Ireland (Republic) 31 deals
Sweden 30 deals
India 28 deals
Top 10 inbound bidders by deal value 2016 (US$ million)
Ireland (Republic) US$45,456
(US$28.4 billion), behind Canada, Germany (US$84.4 billion), China (US$63.6 billion) and Ireland (US$45.5 billion). However, it should be noted that German and Irish figures are skewed by Bayer AG's US$63.4 billion acquisition of Monsanto and Shire's US$35.2 billion deal for Baxalta Corp, respectively.
China, meanwhile, also ranked in the top five of the volume standings, with 79 deals. Despite CFIUS objecting to both Philips' US$2.6 billion sale of its lighting components business to a Chineseled consortium and chip manufacturer Aixtron's US$547 million sale to China's FCG, only Canada, the UK and Japan (91) accounted for more inbound deal volumes. One large Chinese takeover saw electrical appliance manufacturer Qingdao Haier buy GE Appliances from General Electric for US$5.6 billion.
Given the attractiveness of the US relative to other jurisdictions, US M&A seems to be coalescing around the domestic and inbound markets. Indeed, outbound deal volumes for the period fell from 1,399 transactions in 2015 to 1,259 deals in 2016.
The uncertainty caused by the UK's Brexit vote--and its impact on the wider EU block--is another factor that has slowed outbound dealmaking. The UK is the most active market for outbound US deals, accounting for 266 deals in 2016. UK volumes were significantly higher than the 173 outbound deals targeting Canada. Germany, with 91 deals, and France with 69, were the next most popular countries for outbound deals, underscoring the importance of the UK and Europe to outbound US M&A.
Overall outbound deal value data also demonstrates how key Europe is for US investors pursuing cross-border deals. The UK led the rankings with US$63.3 billion worth of deals. The Netherlands came next with US$49.4 billion worth of deals, a figure inflated by Qualcomm's US$45.9 billion bid for Dutch semiconductors business NXP Semiconductors.
United Kingdom US$28,433
South Korea US$10,245
6 White & Case
US inbound M&A 2011--2016
Number of deals
0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0
Deal value (US$ million)
Top outbound targets by volume 2016
United Kingdom 266 deals
Canada 173 deals
Germany 91 deals
France 69 deals
India 58 deals
Australia 57 deals
Italy 49 deals
Netherlands 49 deals
Brazil 45 deals
Ireland (Republic) 35 deals
Top outbound targets by value 2016 (US$ million)
Given the attractiveness of the US relative to other jurisdictions, US M&A seems to be coalescing around the domestic and inbound markets
United Kingdom US$63,256
Ireland (Republic) US$25,113
Building momentum: US M&A in 2016 7
The Trump ultimatum
Donald Trump's victory in the US Presidential election caught many by surprise, and M&A markets are still trying to make sense of what a Trump Presidency means for the economy and for dealmaking.
Although there are elements of uncertainty around, initial indications strongly suggest that the overall impact of the new President's policies will strongly favor business and M&A.
"I'm not sure anybody knows what to expect, but if you look at some of Trump's appointments to date, there are a number of people who have been very successful in business," says White & Case partner Mort Pierce. "Also, Trump has said that he's going to cut back on regulation, which will benefit a number of companies and potential deals. Trump is a businessman and I believe his administration will be pro-business."
The new administration and Congress have signalled their plans to stimulate growth by cutting taxes, encouraging
corporates to bring cash held abroad back into the US and soften Dodd-Frank banking rules. If implemented, such probusiness measures are likely to support M&A activity.
In particular, Trump's plans to reduce the taxation of overseas cash holdings repatriated to the US could be a gamechanger if they go ahead. Moody's Investors estimates that corporate America has around US$1.3 trillion of "trapped cash" held abroad. If this capital was returned to the US, it is possible that much of it could be deployed in M&A.
The new President's plans to increase investment in infrastructure could also boost M&A in the sector, particularly in the energy space.
"Infrastructure in midstream oil and gas and power is set to really take off. There are a number of deals that stalled or were canceled during the Obama administration that could very well go forward under the Trump administration," says Jason Webber, a partner at White & Case. "Obviously these include
both the Keystone XL and Dakota Access pipelines, which President Trump recently put back on the table by Executive Order," he adds.
Conversely, however, there are concerns that Trump's plans to cut taxes and increase infrastructure could see inflation and interest rates rise, which will make financing for deals more expensive.
Campaign rhetoric could discourage foreign buyers from pursuing US-based acquisition targets. So far there have been no signs of inbound M&A slowing, but some inbound investors may pause to see what Trump does in office before pursuing deals. Other populist statements from the new President could also give dealmakers, both foreign and domestic, reason for some caution.
"There is some uncertainty as the new President takes office. It wouldn't be a surprise for dealmakers to get a read on the new administration over the first quarter before jumping in," says White & Case's Greg Pryor.
8 White & Case
US M&A in figures
Total US M&A 2011--2016
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
TMT, pharma and consumer poised to be most active sectors in 2017
The M&A Forecaster* predicts sector deal flow by volume in the US M&A market for 2017.
Lowest deal flow
23 Construction 36 Real estate
39 Leisure 31 Transportation
135 Financial services
161 Industrials and chemicals 251 Pharma
221 Business services 164 Energy, mining and utilities
Highest deal flow 411 TMT
Private equity exits 2011--2016
Number of deals
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Deal value (US$ million)
The number of US M&A deals in 2016 worth over US$10 billion, compared
with 41 in 2015
Indicated by size, where the smallest is US$128,961 million, and the largest is US$546,436 million. * The Intelligence Forecaster is based on "companies for sale" tracked by Mergermarket in the United States between July 12 2016 and January 12 2017. Mergermarket's Intelligence Forecaster of predicted deal flow is based on intelligence relating to companies rumored to be for sale, or officially up for sale. It is therefore indicative of sectors that are likely to be most active during 2017.
Building momentum: US M&A in 2016 9
Sector watch: Industries seek M&A to fend off pressure
TMT continues to drive more deals than any other sector, but industrials and chemicals and energy, mining and utilities also performed strongly through 2016
TMT, once again, was the most active sector for M&A in 2016, generating more deal volume and value than any other industry.
There were 1,114 TMT deals in the US in 2016 worth US$363 billion. Value was boosted by a series of megadeals in the sector, including AT&T's US$105 billion bid for Time Warner, Microsoft's US$25.5 billion acquisition of LinkedIn and CenturyLink's US$34.5 billion purchase of Level 3 Communications.
Activity in the industry has been underpinned by a variety of drivers, including convergence between mobile telephony, broadband and content; appetite to acquire spectrum in order to service demand for wireless connectivity; and buying in social media technology.
Industrials and chemicals recorded the second-highest deal volume, with 832 deals worth US$207.12 billion, including Bayer's US$63.4 billion move for Monsanto.
Corporates in the sector have been pursuing M&A in order to consolidate an industry characterized by thin margins and low growth. Indeed, figures from the World Bank suggest that the percentage growth of value-added agriculture fell to under 3 percent in 2015 compared with 4.8 percent two years previously.
Although it didn't match volumes in industrials and chemicals, the energy, mining and utilities industry posted the second-highest deal value by sector, with 451 deals worth US$338.6 billion. The energy infrastructure sector was particular active. Indeed, Sunoco Logistics Partners buying Energy Transfer Partners for US$51.4 billion, Canada's Enbridge acquiring Spectra Energy for US$41.4 billion and NextEra Energy announcing a US$18.4 billion deal for Energy Future Holdings accounted for three of the 10 largest deals in the US in 2016.
Low commodity prices and falling margins have driven consolidation,
Percentage increase in US TMT M&A year-on-year, with
1,114 deals in 2016 compared with 1,061 in 2015
spin offs of non-core assets and businesses, as well as opportunities in distressed situations. While oil prices appear to be on the road to recovery for now, these pressures have reshaped the industry as we enter 2017.
White & Case partner Greg Pryor notes that restructuring and consolidation has continued to be a primary driver of M&A in the oil and gas sector.
"If you look back to 2012 and 2013, the price of oil has halved, upstream oil and gas companies have been in retrenchment mode, as have oilfield services businesses. Companies have had to cut costs and there hasn't been much investment as a result," Pryor says. "When there have been large deals, they have not been driven by growth, but more by defensive necessity."
GE's US$31.7 billion merger of its oil and gas business with Baker Hughes also ranked among the ten biggest US deals in 2016. The deal, seen by some market
Top sectors 2016, by volume
Number of deals
Industrials Business Pharma, Consumer Financial Energy, Construction Leisure Transportation Real
and services medical
Building momentum: US M&A in 2016 11
The recovery of real estate M&A
Despite flat construction levels and tight lending, M&A activity in the real estate and hospitality sector has held steady during the last year.
Landmark projects, such as the multi-use Hudson Yards development in New York, and continued interest in US real estate from investors abroad, sustained activity levels and offset low growth expectations for real estate investments. Analysis by investment bank Lazard shows that although almost two-thirds of real estate companies reduced 2017 earnings guidance, net operating income (NOI) growth in core real estate sectors such as apartments and hotels is still outpacing inflation. Lazard is forecasting 3.6 percent growth for the sector in 2017 and 3.2 percent in 2018.
White & Case partner Steven Lutt says foreign investment was one of the key drivers of the steady performance of the real estate M&A market. Indeed, some of the biggest real estate US deals in 2016 included China's Anbang Insurance Group acquiring Strategic Hotels & Resorts for US$5.5 billion and Brookfield Property Partners sale of a 49 percent stake in 1 New York Plaza to China Investment Corp.
Willingness from investors to take minority stakes in assets or enter into joint ventures has also helped to keep deals flowing. This has helped to bring sellers, especially those reluctant to sell out of landmark properties altogether, to the table.
Looking forward to 2017, Lutt expects more of the same. Rising interest rates may squeeze real estate returns, which could widen price expectations between buyers and sellers. There are also signs that some markets may be softening. New President Donald Trump, however, should be supportive of the industry, especially if he follows through on promises to reduce banking regulation. This could help to free up financing for smaller real estate projects, which have found it difficult to source bank funding because of regulatory restrictions.
"Deals will still get done. There are buyers out there and there is still inventory of good projects to invest in," Lutt says.
12 White & Case
Top sectors 2016, by value (US$ million)
TMT Energy, mining
and utilities Industrials and
medical and biotech
Business services Consumer Financial services Real estate
Deal value (US$ million)
commentators as a transaction that will create the first energy services company operating across the supply chain in upstream exploration and production, mainstream transportation and downstream refining, could point the way to what other deals in the sector might look like in the future.
Although pharmaceuticals, medical and biotechnology dealmaking was down on 2015, with volume for 2016 coming in at 533 deals and value at US$176.77 billion, the sector still delivered some significant deals. These included Abbott Laboratories announcing a US$29.9 billion transaction to buy cardiovascular medical devices group St. Jude Medical and Irish pharma group Shire paying US$35.2 billion for US counterpart Baxalta.
Tax inversions, a driver of pharma M&A interest in 2015, may be
less appealing after new rules restricting their use were drafted, but pharmaceutical companies still need to consider M&A seriously in order to replenish drug pipelines and buy new drugs to fill revenue gaps left by products about to go off-patent. For instance, AbbVie's acquisition of drug startup StemCentRx for US$5.8 billion in April was done to expand AbbVie's pipeline of oncology drugs.
"In pharma there's always a sense that companies need to be bigger to support R&D and fund the discovery of the next big blockbuster drug," says White & Case partner Mort Pierce. "It makes sense to combine, so I think you'll still see deals. Even before tax inversions became a driver of pharma deals there were a number of large deals in the pharma space. There is always that strategic imperative."
Infrastructure opportunities Dealmakers in the infrastructure sector enjoyed a bumper year of M&A in 2016, with the energy infrastructure subsector especially busy.
Canadian pipeline business Enbridge's aforementioned acquisition of Spectra Energy Group for US$41.4 billion and Great Plains Energy's US$12.1 billion takeover of Westar Energy were both among the 10 largest transactions in the US in 2016. Other notable infrastructure deals included Fortis' US$11.3 billion deal for electricity transmission company ITC, Canada's Algonquin Power & Utilities Corp's US$2.4 billion purchase of Empire District Electric Company and Legal & General's public-private partnership with the University of California to expand its Merced campus. The latter deal is Legal & General's first infrastructure deal in the US and the first public-private partnership (PPP) in the education sector in the US.
Jason Webber, a partner at White & Case, believes that the sector is in for an even busier year in 2017.
"It is a very good time to be an infrastructure dealmaker in the US. Investment in midstream oil and gas and power infrastructure is really going to take off and the outlook for investment in public infrastructure, like airports and toll roads, is also very positive," he says.
Webber says it is important to make a distinction between energy infrastructure and public infrastructure, as they have different drivers and are financed in different ways. Both infrastructure groupings, however, stand to benefit from policies outlined by new President Donald Trump.
With regards to energy infrastructure, Webber says the new administration is noticeably "pro oil and gas, pro coal and pro energy, and anti-regulation of those markets", which makes it much more likely that projects such as Keystone XL and the Dakota Access Pipeline will be built.
"I think that there will be a significant uptick in oil and gas infrastructure investment, and it will dovetail with the stabilization of the price of oil. You are going to see a lot of activity involving these kinds of assets," Webber says.
Public infrastructure, meanwhile, should receive a boost from Trump's plans to secure US$1 trillion of new
investment in infrastructure and support PPPs through tax breaks.
"As a businessman, and as someone who is involved in real estate and construction, I think President Trump sees PPPs and similar structures as a compelling way to follow through on his promise to increase investment in infrastructure," Webber says. "I think that there are reasons for being very, very optimistic that Trump will be able to invigorate the PPP market in the US and to really take it to the next level."
In addition to a supportive administration, infrastructure M&A will also be driven by the substantial sums raised by infrastructure funds. In a low interest rate environment, investors have been desperate for yield, which has seen investment in infrastructure soar.
According to Preqin, investors committed US$57.5 billion to
Rise in energy, mining and utilities M&A value in the
US, from US$205 billion in 2015 to US$339 billion
infrastructure funds in 2016, which pushed up the amount of dry powder available for infrastructure deals to US$140 billion.
"Interest rates have been so low, especially in Europe where a lot of the capital comes from. As a result, institutional investors are looking at infrastructure as part of their `real assets pool' very favorably and putting a lot of capital to work," Webber says. "What that means is a large amount of M&A activity in infrastructure. Everybody needs to deploy, because you have to get those funds to work and you have a limited time period to invest."
With a new administration in place and large pools of capital seeking deals, the outlook for infrastructure transactions is very bright indeed.
Building momentum: US M&A in 2016 13
In focus: Tech and M&A
The TMT sector was once again the busiest and biggest sector for dealmaking in 2016, driven by the continued technology boom
There were 1,114 TMT deals worth US$363 billion in 2016. Even though wider M&A markets were muted, the sector continued to deliver landmark deals in the technology space, such as Microsoft's US$25.5 billion acquisition of LinkedIn and CenturyLink's US$34.5 billion purchase of Level 3 Communications.
Jason Rabbitt-Tomita, a partner at White & Case, says it is not unusual for technology dealmaking to remain relatively insulated from wider macro-economic and M&A trends.
"The M&A market for technology is less closely tied to the overall health of the economy. It is less about whether GDP is growing by 1 percent versus 3 percent in the next year. The value generated by acquisitions is much more fundamental," he says. "Deals are driven by new technology and data that allow for the provision of new goods and services to consumers in a way that results in market growth that is outsized and above the normal rate of growth."
Microsoft's purchase of LinkedIn is an example of how the combination of technology and data is sustaining deal activity in the tech space. The quality of LinkedIn's data and
As the combination of technology and data becomes increasingly valuable, it will stimulate M&A in other technology subsectors
membership is of the highest order and serves as an invaluable resource for the development and marketing of new goods and services. The deal shows that the technology industry has become less focused on developing proprietary software and locking users into particular technology ecosystems. Instead, the priority is about analyzing data to identify new customers and sell more to existing ones.
Rabbitt-Tomita says that as the combination of technology and data becomes increasingly valuable, it will stimulate M&A in other technology sub-sectors, such as artificial intelligence.
"There is a lot of interest in artificial intelligence. I think the reason for that is the emphasis on processing data efficiently and taking that data and monetizing it. The numbers are not super large but if artificial intelligence gets bigger, which it very well could, that could be something on the tips of people's tongues more often," Rabbitt-Tomita says. (For more on the potential of artificial intelligence M&A, see page 16).
In addition to linking software and data, ongoing convergence across the cable, television, broadband and telephony industries has continued to be a strong driver of deals in the TMT sector, as demonstrated by AT&T's Time Warner bid. Consolidation across these industries has raised antitrust challenges, but the fundamentals underpinning the deals are so strong that companies have continued to pursue M&A.
"If you look at consolidation in the cable and TV and content provider space, it does appear to be driven very much by the transformation of the way in which people are consuming content, which is very much technology driven. The traditional cable business is looking forward 10 years and realizing
Number of technology deals in the US in 2016, compared with 810
Number of US technology M&A deals in 2016 worth
US$1 billion or more
that it needs to have content and the infrastructure to distribute that content over the internet to consumers. They have to do these deals in order to shape themselves appropriately going forward," Rabbitt-Tomita says.
The semiconductor industry is another technology subsector where deal activity has been robust, with Qualcomm's US$45.9 billion acquisition of Dutch group NXP Semiconductors one of the key deals in the semiconductor space in 2016.
"The semiconductor industry requires a heavy amount of capital investment and a lot of R&D. I think many of the transactions have been driven by simply achieving economies of scale," Rabbitt-Tomita says. "Companies feel that they can reduce the cost structure and get more revenue. It is accretive to combine and that trend may very well continue."
Building momentum: US M&A in 2016 15
AI M&A just got real
Breakthroughs in deep learning are set to drive a surge in M&A activity in the artificial intelligence (AI) space in 2017 and beyond
W ith 1,114 TMT deals in the US in 2016 worth US$363 billion, the sector outstripped other industries as dealmakers pursued innovative intellectual property and battled to stay technologically relevant in an ever-advancing digital economy.
While technology megadeals such as Microsoft's US$25.5 billion acquisition of LinkedIn hogged the headlines, M&A in the nascent but rapidly growing AI arena fired the imaginations.
AI deals on the rise AI is the field of technology that enables machines to conduct operations that previously only humans could perform (for more on AI, see The lowdown on AI, opposite). In the past five years, investment in AI has rapidly accelerated. Research group CB Insights found that there have been 140 acquisitions of AI companies since 2011, with well over a quarter of these (40) in 2016 alone--an eightfold increase in AI M&A since 2011.
Digital media company TheStreet reported that since 2011, a total of 1,098 deals attracted US$6 billion in global AI equity funding. Equity financings in AI climbed by 746 percent between 2011 and 2015, from US$282 million to US$2.4 billion--paving the way for a rush of M&A activity in this area.
According to Arlene Hahn, a partner at White & Case: "It is not just the tech that is driving AI deals, but also the talent. Demand for top teams means that `acqui-hires' [deals based on talent acquisition] are very much part of dealmaking strategy." However, Hahn notes, "AI talent comes at a cost". Twitter's 2016 US$150 million acquisition of AI startup Magic Pony far exceeded the industry norm--landing at US$10.7 million per each of its 14 employees.
The number of private AI companies that have been acquired since 2011, according to figures from CB Insights
US$2.4 billion The value of equity financings in AI in 2015, according to TheStreet
Why AI? Although modern research on AI has been underway since the mid-1950s, the last decade has seen prodigious leaps in the field. A number of factors have contributed to this growth.
The first is big data. Data is the lifeblood of AI and the success of any machine learning technology depends on the quantity and quality of available data. Advances in the widespread adoption of Internet of Things (IoT) devices have resulted in exponential growth in data generation. As smart and connected devices rapidly infiltrate our offices, homes and cars, the volume of data multiplies. Indeed, researchers at the International Data Corporation have predicted that the total amount of digital data created globally would explode from 4.4 zettabytes in 2013 to 44 zettabytes by 2020 to 180 zettabytes by 2025. Putting that into perspective, 1 zettabyte is equivalent to around 152 million years of high-definition video.
Meanwhile, advances in chip technology and computational power have enabled machines to quickly and efficiently mine and analyze this data and to deploy deep learning networks. And innovations in the semiconductor industry continue to drive growth. Major chipmakers are making acquisitions in the deep learning chip technology space, while several startups are hoping to disrupt the industry by creating new chips that they claim are faster than graphic processing chips (the standard for implementing deep learning algorithms due to their high speed), and more efficient than field programmable gate arrays (popular for energy efficiency and adaptability).
In addition, social changes have contributed to the rise in the popularity of AI. The use of datacollecting applications and devices has mushroomed in recent years with the ubiquity of social media as
While technology megadeals such as Microsoft's US$25.5 billion acquisition of LinkedIn hogged the headlines, M&A in the nascent but rapidly growing AI arena fired the imaginations
well as innovations such as Apple's Siri, Amazon's Alexa and Fitbit, and services such as Uber and ZocDoc. Just like automated service providers and the cloud before it, the rapid adoption of AI into the daily lives of consumers has created an environment ripe for further development and investment.
AI deal open to all Given the growth in the market, AI deal activity is poised to surge in 2017 and beyond. A survey by research firm Forrester indicated that there will be more than a 300 percent increase in investment in AI in 2017 compared with 2016. Meanwhile, Accenture recently forecast that the market for AI would grow from US$4.5 billion in 2014 to US$9.2 billion in 2019.
However, the value that AI can deliver is by no means limited to technology companies. Large industrial organizations such as GE have been investing in emerging AI companies such as Bit Stew, whose technology is geared towards
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utilities, oil and gas, aviation, and manufacturing, to bring machine learning to the Industrial IoT.
Furthermore, other startups such as BenevolentAI, are pushing deep learning technologies into new territories, including pharmaceutical R&D. As the collection and analysis of data becomes an integral part of all businesses, from fitness clubs to logistics companies to retailers, the reach of AI's application to a wider range of industries increases-- and therefore, more deals for its capabilities will inevitably follow.
AI deals--need to know AI is becoming a central pillar of business across all sectors, and companies need to start investigating how they can apply it to their businesses. When it comes to absorbing AI into your business, two key considerations are whether you develop or acquire it, and ensuring data quality.
AI is a highly specialized field. This means that talent is limited. William Choe, a partner at White & Case, notes: "Companies considering AI should determine whether they have the resources in-house to build and deploy deep learning or other AI technologies. If not, an acquirer will need to consider investing in talent via acqui-hires and/or acquiring partially developed AI technologies on which a platform may be built in order to augment its internal expertise and capabilities."
On top of this, the success of AI depends on the quality and quantity of its data set. AI can not only analyze and review structured data (i.e., data that is easily held in traditional databases such as payment ledgers) but also unstructured data (i.e., data that is not easily organized into traditional categories, such as the human language). And businesses now hold massive amounts of both data types. However, if companies want to capitalize on this data, Hahn notes, "first they need the technical capability to capture data in a way that informs cognitive analytics. And, second, they need to have sufficient legal procedures in place to ensure that its data collection is compliant with security regulations."
The future is now From chips to devices and analytics to applications, AI is infiltrating every segment of our lives, and therefore, the market. And it's not just for tech titans anymore. Even industries that are traditionally low-tech can leverage AI technologies, such as natural language processing and predictive analytics, which can boost productivity and increase efficiencies. However, businesses will need to move fast because AI startups will be highly coveted acquisition targets in 2017.
The lowdown on AI
Artificial Intelligence (AI): AI (also known as cognitive computing) is technology that enables machines to perform tasks that previously required human intelligence, such as speech recognition, visual detection, learning, decision making and problem solving. Machine learning: This is a subset of AI in which algorithms review and analyze data in order to make predictions or determinations. Rather than being limited to programming instructions, machine-learning algorithms improve and "learn" as they get exposed to more data. Deep learning: This is a type of machine learning that uses networks of algorithms to simulate the multilayered neural networks of the human brain. Unlike machine-learning algorithms, deep learning networks are capable of "learning" from raw data itself--with little instruction from the programmer--and to continually scale with larger data sets.
Building momentum: US M&A in 2016 17
Private equity strikes as strategics lull
Private equity firms have maintained their investment pace in 2016 even though overall M&A activity has slowed
O verall US M&A activity dropped in 2016 compared with 2015. However, private equity buyouts kept pace with the previous year. Figures for 2016 show that there were 1,030 buyouts over the period, up from the 969 deals recorded in 2015. Value was up marginally as well, from US$159 billion to US$159.4 billion.
TMT remained the most popular target sector in terms of both volume and value, with 243 deals worth US$55.7 billion. Large buyouts in the space included Apollo and Searchlight Capital Partners acquiring IT group Rackspace for US$4.1 billion and Apollo buying ADT, a home security systems developer, for US$12.3 billion.
Increase in US private equity
buyouts in 2016, with 1,030 compared with 969
Industrials and chemicals, a sector undergoing significant consolidation and an ideal candidate for private equity investment, was the next most popular sector with 186 deals worth US$24.5 billion. Business services, a private equity favorite, delivered 158 deals worth US$20.3 billion. The consumer sector, in which there were 122 deals worth US$11.2 billion, also proved popular.
One reason for sustained private equity activity is that many strategic buyers have taken a step back from M&A to consolidate deals closed in 2015. Private equity firms have benefitted as there is less competition for deals from strategics. It also means corporates are focusing on core business and
divesting non-core divisions. This has ensured a steady flow of potential targets for buyout firms, such as Thomson Reuters' US$3.6 billion sale of its IP and science business to Onex Corporation and Baring Private Equity Asia.
"Strategics may see the party coming to an end, or just see too many storm clouds on the horizon and are more cautious," says Oliver Brahmst, a partner at White & Case. For strategics, M&A is not the only avenue for growth. Sponsors are in the business of doing deals. They may gripe over high valuations, but in the end they have to keep hunting for good investments and their investors expect it."
Favorable financing markets have supported buyout activity too. "The
Private equity buyouts by sector, 2016
Real estate Pharma, medical & biotech
Leisure Industrials & chemicals
Financial services Energy, mining & utilities
Defense Consumer Construction Business services Agriculture
50 100 150 200 250
Value (US$ billion)
Building momentum: US M&A in 2016 19
lending market has been frothy enough to allow PE shops to make acquisitions, even at higher price points," says Carolyn Vardi, a partner at White & Case.
Flashing the cash New buyout activity has been sustained by the large sums of dry powder that still need to be deployed. According to Preqin, the amount of capital
One reason for sustained private equity activity is that many strategic buyers have taken a step back from M&A
available to private equity fund managers is now sitting at a record high of US$839 billion.
"The bottom line for private equity firms is that they have a ton of cash that many of them need to put to work. Obviously they need to make returns and get out to raise money for the next fund, but they also don't want to run into a situation where they've got to return capital commitments," says Matthew Kautz, a partner at White & Case.
Even though deal multiples continue to look punchy, firms have been able to continue deploying funds in a competitive way by being more flexible in their approach. Buyout firms no longer rely exclusively on leverage and control to generate returns. Instead, private equity firms are taking minority stakes in targets and focusing on operational
improvement and investing in smaller platform companies with a view to expanding them into bigger businesses. This helps them to compete with the high valuations cash-rich strategic buyers are paying.
This extended horizon is seen in several deals. For instance, a key part of Platinum Equity's successful US$4 billion bid for Emerson Network Power, a non-core IT infrastructure group owned by Missouri-based Emerson, was the scope it gave management to make longer term plays. Private equitybacking has freed the business to build entire data centers for clients, which had been more difficult as part of a manufacturing-focused parent company.
"Sponsors are expanding the type of investments they will do," Brahmst says. "Sponsors are not averse to investing in minority stakes any more and in different places in the capital structure. Also, club deals, with memberships ranging from sponsor exclusive to sponsors and strategics combinations have started to appear more and more over the past couple of years."
Silver Lake, for example, acquired the Ultimate Fighting Championship (UFC) franchise in a deal through a bolt-on acquisition by portfolio company IMG Worldwide.
Brahmst says sponsors have also adapted to a more competitive market by widening the products available to investors.
"Firms are expanding their offerings by raising industry specific funds and introducing funds with different investment horizons to meet the demand for longer-term capital, albeit at lower rates of return," Brahmst says.
Vardi says buyout firms have also focused on pre-empting formal processes in order to secure deal flow and gain a competitive advantage.
"A number of private equity shops have ratcheted up their efforts to create personal and strong relationships with CEOs of smaller companies so they can parlay those relationships into opportunities for first (proprietary) looks before those companies are put up for auction," Vardi says. "During the past year there was definitely an uptick in pre-emptive offers. As soon as there was a whiff in the air that a company was going to be put up for auction, a private equity shop would come and try and snap it up."
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Exit stage left? Although buyout activity held its level, exit activity dropped when compared to 2015. Exit volumes for 2016 fell to 956 from 963 in the same period last year, while value rose from US$232.1 billion to US$233.2 billion.
"The market is still seller-friendly, but the balance between buyouts and exits has become a little more even. Maybe for the past two or three years, 60 percent to 70 percent of the deals for most firms would have been exits, with maybe one or two buys out of 10 deals. In 2016 I think it was a much more even split," Kautz says.
On the exit front, healthcarerelated companies delivered good outcomes for private equity firms. Madison Dearborn Partners sold medical supplies group Sage Products to technology company Stryker for US$2.8 billion and Veritas Capital sold Truven Health Analytics to IBM for twice the US$1.3 billion it had paid for the company in 2012.
"This is still a very favorable seller's market and private equity is still wellpositioned to make some strong exits," Brahmst says.
Private equity buyouts 2011--2016
Number of deals
0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Deal value (US$ million)
Building momentum: US M&A in 2016 21
Four keys to US M&A success in 2017
Dealmaking ended 2016 on a high note--but to continue, certain factors need to be in place
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Following a slow start at the beginning of 2016, the US M&A market demonstrated its resilience. Uncertainty around some high-profile broken deals, the UK's Brexit vote and the US Presidential election has washed out of the market and the outlook for 2017 is positive. These four broad factors are likely to set the tone for M&A activity in 2017:
The Trump administration's ability to deliver. Donald Trump's pro-business policy platform has the potential to drive M&A activity. Corporate tax reform will deposit a lot of money into the coffers of US businesses, which will be available for capital investments and acquisitions and also, in some cases, return to shareholders. This will directly increase M&A activity to the extent that this additional cash is deployed for M&A purposes, and indirectly boost M&A by increasing the value of targets to the extent that buyers perceive their targets as using extra cash to enhance value. If the new administration can effectively implement its pro-business agenda, M&A markets are likely to thrive.
The health of the US stock market. The most important factor driving global M&A will be the strength of the US market, which is the world's largest by far and therefore has an outsized impact. Strong US stock markets have been one of the cornerstones of M&A activity in the country, giving vendors and buyers confidence to transact. If stock markets remain strong, so will M&A. Any dramatic decline in the US stock market, however, does present downside risk for M&A activity.
The performance of crossborder M&A activity. Actions by CFIUS to block deals and the Trump campaign's anti-globalization rhetoric do need to be taken into account but the fact remains that, for most buyers, the US is generally seen as more attractive than other jurisdictions and the new administration's pro-business agenda should outweigh any protectionist concerns. Favorable changes to taxation and regulation will increase the ability of US companies to make acquisitions around the world and will increase the attractiveness of the US to non-US acquirers.
The continued attractive financing environment. With US interest rates at near-historic lows and bond and loan markets helping to finance some of the year's biggest transactions, 2016's M&A performance owes a debt of gratitude to the friendly financing climate. Yet with the Federal Reserve hinting at more rate rises in the coming year, borrowing in order to buy could become less attractive. The ease of financing will be imperative to 2017's M&A picture, and while rate rises themselves won't derail dealmaking, the willingness to lend needs to remain.
As a new year begins, the fundamentals for strong M&A remain firmly in place: huge amounts of cash; robust stock markets; steady economic growth; and low cost of capital. Global M&A is likely to be strong in 2017 and the US should be perceived as a great place to do deals.
Building momentum: US M&A in 2016 23
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