Investors might reasonably expect the turmoil in global markets this year - fuelled by the tumbling oil price, the Greek debt crisis, economic sanctions on Russia and a slowdown in China - to have poured cold water on companies' desire to wheel and deal. But those challenges haven't led businesses to retrench and take cover: global deals are on track to reach a record $4.58 trillion (£2.99 trillion) this year, according to researchers at Dealogic.
It's hard to unpick the exact drivers behind the recent upsurge in dealmaking - perhaps specific factors have simply outweighed the economic headwinds and geopolitical uncertainty. For example, companies may be looking outside their operations to boost growth in a sluggish global economy. Moreover, after scrimping and saving throughout the recession, they may be seeking out further cost savings. Punchy stock market valuations may also have given management the confidence to pursue takeover activity and facilitated share-based deals. And rock-bottom interest rates have made it a breeze to finance takeover bids and encouraged businesses to put their cash to work.
The bulk of this year's deals have been between US companies. Indeed, the value of US deals has leapt by more than half this year compared with the same period in 2014, while European volumes have risen 15 per cent. That has been driven by a raft of 'mega deals', including Berkshire Hathaway's (US:BRK.A) $32bn bid for Precision Castparts (US:PCP) - the largest in the 50-year history of Warren Buffett's famed conglomerate. The country's voracious appetite likely reflects the recovering national economy, buoyant stock market and the sizeable tax benefits of securing a European domicile. The strengthening dollar has also weighed on the overseas competitiveness of US companies, encouraging overseas ventures. Indeed, the value of deals between US and European companies has reached a 16-year high of $256bn.
US companies have been swarming the UK technology sector in particular: Telecity (TCY), CSR, Pace (PIC), Anite (AIE) have all recommended takeover offers. In a recent column, companies editor Stephen Wilmot cited a difference in business cultures as a possible reason; US tech entrepreneurs are often driven by a desire to build a great business rather than make a short-term return, whereas their European counterparts are generally more willing to sell up if the price is right. Snapchat founder Evan Spiegel turned down a $3bn cash offer from Facebook (US:FB) in 2013 because he found the idea of growing a business more interesting than cashing out.
Companies have also used acquisitions to remove rivals - that was a key benefit of Optimal Payments’ (OPAY) recent takeover of fellow online payments group Skrill. The deal also broadened the group's product range and client base, and management expects to realise substantial cost savings and cross-selling opportunities.
Takeovers have also been a popular method of tapping into growth markets. Deals have been a core element of advertising titan WPP's (WPP) strategy, allowing it to deepen its foothold in emerging nations and increase its exposure to trends such as automated, real-time ad trading. In the entertainment sector, Entertainment One (ETO), ITV (ITV) and others have struck deals to stengthen their content and differentiate themselves from competitors.
Sector-specific factors have also played a role. For instance, telecom companies have struggled to cope with soaring demand for mobile data, streaming video and 'quad play' bundles of television, broadband, landline and mobile services. Combining networks and sharing investment costs with peers has been a popular solution - industry giant BT (BT.A) recently pounced on mobile operator EE.
Meanwhile, oil and gas companies have, arguably, been trying to buy their way out of trouble amid tumbling commodity prices. A record $314bn in deals have been announced this year – more than double the figure for the same period in 2014. For instance, Schlumberger recently agreed a $12.7bn cash-and-shares deal to acquire rival Cameron International - a 10 per cent discount to Cameron’s share price a year ago. Other deals include the proposed $35bn merger of Halliburton (US:HAL) and Baker Hughes (US:BHI) and Royal Dutch Shell's (RDSA) £47bn April bid for BG Group (BG).
Still, there's no guarantee the wave of deals will continue unabated. The US Federal Reserve’s mooted increase in interest rates could discourage further tie-ups - but there could also be a flurry of deals before rates rise. Geopolitical tensions or a regional economic downturn could dampen the surge, but may also spur overseas acquisitions as businesses look to hedge their bets.
Annual value of global deals 2000-2015
