Technology Emerges Leading Sector for M&As in 2016

Bayer’s $66-billion takeover of Monsanto biggest all-cash deal in 2016

The year 2016 got off to a slow start for mergers and acquisitions (M&As) mainly due to political and economic uncertainties related to the UK Brexit vote, a turbulent election cycle in the US, and a slump in equity capital raising globally. In comparison, 2015 remained the largest-ever for M&A volume as deals worth $4.68 trillion were struck during the year. According to global deal tracking firm Dealogic, global M&A plunged 24% Y-o-Y to $2.50 trillion in January-September 2016, after three years of consecutive increases and compared to transactions worth $3.27 trillion announced in January-September 2015. However, the US continued to remain an attractive market for in-bound M&As, led by buyers in Europe, Canada, and Asia, as the nation’s economy continued to be attractive despite its many challenges.

Technology sector clocks highest M&A by value

In terms of M&A value, the technology sector with $465.3 billion replaced healthcare as the leading sector for M&A in 2016. Some of the high-profile technology acquisitions that bagged headlines in 2016 were HP Inc. (NYSE: HPQ) buying Samsung’s printer business for $1.05 billion, SoftBank buyout of chipmaker ARM for $32 billion, Verizon Communications Inc. (NYSE: VZ) buying Yahoo Inc.’s (NASDAQ: YHOO) internet assets for $4.8 billion, and technology giant Oracle Corp.’s (NYSE: ORCL) acquisition of NetSuite Inc. (NYSE: N) for $9.3 billion in an all-cash deal in November 2016.

Microsoft Corp.’s (NASDAQ: MSFT) buyout of LinkedIn Corp. (NYSE: LNKD) for $26 billion was one of the largest tech deals in 2016. The LinkedIn deal is largely seen as CEO Nadella’s efforts to revamp the Company and shift towards software and services delivered over the Internet as the Company focuses on business customers with cloud-based services and productivity tools.

Largest deals in 2016

The largest deal in 2016 was that of German drug and crop chemical maker Bayer AG’s $66-billion takeover of US seeds company Monsanto Company (NYSE: MON), which is also the biggest all-cash deal on record. Some of the other big deals included Enbridge Inc.’s $28 billion acquisition of Spectra Energy Corp. (NYSE: SE) to create the largest North American energy infrastructure company.

Other deals included Abbott Laboratories Inc.’s (NYSE: ABT) $30.5 billion takeover of US medical products maker St Jude Medical Inc. (NYSE: STJ) and French yogurt company Danone S.A.’s buying organic foods producer The WhiteWave Foods Co. (NYSE: WWAV) for $10.4 billion in July 2016.

Drug firms pay high premiums for M&A

Despite regulatory, political, and market headwinds, drug companies continue to be willing to pay high premiums to buy new products, rather than channel their resources in a risky and long drawn drug development process. In August 2016, Pfizer Inc. (NYSE: PFE) announced a $14 billion deal to acquire cancer drug maker Medivation Inc. (NASDAQ: MDVN), at a 118% premium to Medivation’s share price. In September 2016, Allergan PLC’s (NYSE: AGN) $1.7 billion offer for Tobira Therapeutics Inc. (NASDAQ: TBRA), is a whopping 500% premium to the Tobira’s stock price.

Another major factor that reduced the appetite among dealmakers was that many potential deals came under the scanner of US antitrust authorities and other regulatory bodies for aiding tax avoidance or seeking to harm national security. In 2015, Pfizer’s $160-billion agreement to acquire Allergan was abandoned after deal raised the US tax collectors’ eyebrows as they felt that Pfizer had planned the merger in a bid to cut its tax liability. In the US, corporate attracts a tax liability of 35%, while in the U.K. corporate tax stands at 20%.

Other major pharma deals included Pfizer’s acquisition of California-based Anacor Pharmaceuticals Inc. (NASDAQ: ANAC) for $5.2 billion, Allergan’s acquisition of drug-eluting ophthalmological implant maker ForSight Vision5 for $95 million, Allergan’s $639 million buyout of Vitae Pharmaceuticals Inc. (NASDAQ: VTAE), which is developing drugs for psoriasis, eczema and autoimmune disorders. Allergan also paid $60 million for RetroSense, a privately held company developing an ophthalmology gene therapy.

Terminated deals in 2016

Some major acquisitions in 2016 did not go through due to regulatory hurdles. Oilfield services providers Halliburton Co. (NYSE: HAL) and Baker Hughes Inc. (NYSE: BHI) terminated their $38 billion merger deal after opposition from US and European antitrust regulators in May 2016. In February 2016, Koninklijke Philips N.V. canceled a planned $2.8 billion sale of its lighting-components unit to a consortium led by China’s GO Scale Capital, after the Committee on Foreign Investment in the US objected.

Beleaguered microblogging site Twitter Inc. (NYSE: TWTR) was also in the headlines for a possible acquisition, after having garnered interest from Salesforce.com Inc. (NYSE: CRM), Alphabet Inc.’s (NASDAQ: GOOGL) Google, Apple Inc. (NASDAQ: AAPL), and Microsoft Corp. (NASDAQ: MSFT). However, a deal did not materialize after the potential suitors lost interest in the company.

Deals so far in 2017

The year 2017 got off to a solid start for M&As when London-based British American Tobacco PLC (BAT), one of the world’s five-largest tobacco companies, has reached an agreement to acquire Reynolds American Inc. (NYSE: RAI), the second-largest tobacco company in the US, in a $49.4 billion takeover to create the world’s largest listed tobacco company, as reported by Bloomberg on January 17th, 2017.

Oil producer Noble Energy Inc. (NYSE: NBL) announced on January 16th, 2017, that it would acquire Midland, Texas-based oil producer Clayton Williams Energy Inc. (NYSE: CWEI) for about $2.7 billion in a cash-and-stock deal to step up its presence in the Permian Basin, the top US oil field. On January 18th, 2017, Hewlett Packard Enterprise Co (NYSE: HPE) said that it would buy privately held cloud software company SimpliVity for $650 million in cash, as it looks to expand in the fast-growing market for hybrid cloud platforms. Russia’s Rosneft sold its 12% stake in Italian refiner Saras for 1.53 Euros a share, raising around 175 million euros ($187 million) on January 18th, 2017.

China’s supermarket chain operator Yonghui Superstores Co Ltd said it would team up with Bain Capital Private Equity to buy US retail services group Daymon Worldwide Inc. for $413 million. Several M&As, which were held back due to the uncertainty related to the US Presidential election and the possible change of economic policies by the new government, are now bagging headlines, signaling a consolidation wave sweeping across several industries.

President-elect Donald Trump, who is set to assume office on Friday, January 20th, 2017, has sent out mixed messages with regard to new taxation policies and trade agreements. It remains to be seen if the new government sets in motion favorable policies and an economic agenda that will provide a conducive environment for M&A for the remaining part of the year.

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