Intralinks® Deal Flow Predictor

Our quarterly prediction of future trends in the global M&A market

Forecast of global M&A activity through Q2 2016

Includes guest commentary from Dr. J. Keith Dunbar, founder & CEO of Potentious

Welcome [SIDEBAR]

Welcome

Welcome to the latest edition of the Intralinks Deal Flow Predictor (DFP) report. The Intralinks DFP forecasts the volume of future mergers and acquisitions (M&A) announcements by tracking early-stage M&A activity – sell-side M&A transactions across the world that are in the preparation stage or have reached the due diligence stage. These early-stagedeals are, on average, six months away from their public announcement.

Along with our forecast of announced M&A activity for H1 2016, this edition of the Intralinks DFP includes:

  • a spotlight feature on the reasons behind the surge in megadeals (deals with a value over US$10 billion) – and why 2016 could see less of them;
  • the Intralinks Mid-Market Monitor, a snapshot of almost 1,000 new actionable deal opportunities added in Q4 2015 to Intralinks Dealnexus®, the largest global online deal sourcing and M&A social network, exclusively for dealmaking professionals;
  • an interview with Dr. J. Keith Dunbar, founder and CEO of Potentious, an M&A consulting firm in which Dr. Dunbar discusses his recent research that has focused on identifying leadership areas and competencies, in both acquirers and targets in M&A transactions, that are predictors of M&A success; and
  • the results of the Intralinks Global M&A Sentiment Survey, which polled 680 dealmakers in December 2015.

Intralinks is the leading global provider of software and services, including Virtual Data Rooms (VDRs), for managing M&A transactions, private equity fund raisings and corporate development, and has been in business for more than 19 years. Our involvement in the early stages of a significant percentage of the world’s M&A transactions gives us unique insight into the expected volume of future announced M&A deals.

WATCH NOW: QUICK REVIEW

See highlights from this report in one minute

[INSERT VIDEO LINK]

Predicting deals [SIDEBAR]

Predicting deals: Intralinks’ forecast of Thomson Reuters’ future reported volume of announced deals for the next two quarters

The Intralinks DFP has been independently verifiedas an accurate predictor of future changes in the global volume (number) of announced M&A transactions, as reported by Thomson Reuters. Quarter-over-quarter percentage changes in the Intralinks DFP are typically reflected (on average) six months later in announced deal volumes. The Thomson Reuters data on announced deal volumes for the past four quarters has been adjusted by Intralinks for expected subsequent changes in reported announced deal volumes.

Introduction [SIDEBAR]

Introduction

[INSERT MATT PORZIO HEADSHOT]

Matt Porzio

VP of Strategy & Product Marketing, Intralinks

Global early-stage deal activity in Q4 2015 increased by 8.1 percent[1], a faster rate of growth compared to the 5.2 percent increase in Q3 2015. The acceleration in growth of early-stage M&A activity in Q4 2015 was seen in three out of the four global regions – Latin America (LATAM) being the exception. In North America (NA), early-stage M&A activity increased by 5.4 percent in Q4 2015, following the 3.2 percent decline we saw in Q3 2015. In Asia Pacific (APAC), early-stage M&A activity increased by 9.8 percent in Q4 2015 compared to 1.8 percent in Q3 2015. In Europe, the Middle East & Africa (EMEA), early-stage M&A activity increased by 11 percent in Q4 2015 compared to 10.4 percent in Q3 2015. In LATAM, early-stage M&A activity increased by 7.4 percent in Q4 2015 compared to 48.6 percent in Q3 2015.

In Q4, global dealmakers, especially those in NA and APAC, appear to have shrugged off their concerns fromQ3 over US interest rate policy, an economic slowdown in China, a slowing global and U.S. economy and the turmoil in Chinese and emerging markets equities, prompting an acceleration in the rate early-stage M&A activity. We think some of the reasons for this are as follows:

  1. Global markets reacted calmly and mostly positively to the U.S. Federal Reserve’s (Fed) decision to raise the target range for its key interest rate by 0.25 percentage points on December 16, the first increase since June 2006.
  2. Despite the slowdown in global economic growth in 2015, dealmakers appear to be looking ahead: according to the International Monetary Fund (IMF), global economic growth in 2016 is due to edge up by 0.3 percentage points to 3.4 percent compared to 3.1 percent in 2015.
  3. The surge in announced transactions with valuesover US$10 billion (so-called “megadeals”) seen in 2015, especially in the last quarter of the year, appears to indicate continued dealmaking confidence and “animal spirits” – which we examine in more detail in our spotlight feature.
  4. Despite the Fed interest rate hike in December, globally rates remain extremely low by historical comparisons and debt financing for acquisitions remains cheap and plentiful.
  5. Despite the expected uptick in global economic growth this year, inflationary pressures appear to be remarkably subdued, especially in the advanced economies and even in many emerging markets. Top line revenue growth becomes hard to achieve during periods of very low inflationor deflation, so companies turn to M&A to boost revenues and profits through cost cutting and synergies. Competition for acquisition targets also drives up deal valuations: the median ratio of target Enterprise Value (EV) to Earnings Before Tax, Depreciation and Amortization (EBITDA) for deals announced in 2015 increased to 13.2x compared to 12.0x in 2014 (and higher than the 12.6x seen in 2007, the previous peak year for M&A), according to data from Thomson Reuters.

Our key predictions for the next six months

  1. The number of global announced M&A deals in the first half of 2016 will be modestly higher than the first half of 2015. The mid-point of our forecast is for 3.5 percent growth, with a range between1.5and6 percent.
  2. In EMEA, recovering economies and quantitative easing (QE) measures by the European Central Bank (ECB) will continue to support strong levels of M&A activity in the Eurozone countries. Dealmakers targeting the UK will remain bullish, shrugging off uncertainty surrounding the anticipated UK EU membership referendum and the possibility of a destabilising “Brexit” decision. M&A activity levels in Africa and the Middle East will suffer from the slowdown in Chinese demand for commodities, continued low oil prices and political instability.
  3. In NA, we expect a modest increase in M&A activity as a result of the Fed taking a cautious approach to further interest rate rises in 2016, continued steady US economic growth, lower raw material and energy costs due to low oil prices and a stronger dollar.
  4. In APAC, economic and market events in China will dominate the region and also affect the rest of the world. Attempts by Chinese policymakers to support share prices and the Renminbi in the face of a slowing economy will result in increased volatility in asset markets globally. M&A activity levels in Japan and South East Asia look set to increase, whereas the outlooks for Australia, North Asia and South Asia are more uncertain.
  5. Despite the dire economic and political situation in Brazil, M&A activity in LATAM looks set to surprise on the upside as economic growth in Mexico accelerates and dealmakers eye the recovery potential and attractive demographics of the region.

Overview: [SIDEBAR]

Overview: strong 2015 creates momentum for M&A markets in 1H 2016, but increased global economic and financial volatility clouds outlook

[INSERT PHILIP WHITCHELO HEADSHOT]

Philip Whitchelo

VP of Strategy & Product Marketing, Intralinks

In 2015, the total value of announced M&A deals reached a new all-time high: according to Thomson Reuters, the value of announced M&A deals was US$4.8 trillion, a 43 percent increase compared to 2014, surpassing for the first time the previous all-time high of US$4.1 trillion in 2007, just ahead of the global financial crisis. A contributing factor to this strong performance has been the record number of megadeals (deals with a value over US$10 billion) announced last year, a phenomenon that we discuss in more detail in our spotlight feature. According to preliminary estimates by Thomson Reuters and Intralinks, the number of announced M&A deals in 2015 increased by just under 8 percent compared to 2014, rising to a total of just over 45,500 deals, which is within the range we predicted six months ago of a 6 to 9 percent increase, but falling just short of the previous record year of 2007 when just over 46,600 deals were announced.

The reasons for this flurry of deal activity – be it at the top or bottom end of the market – appear to remain the same: corporates are finding it difficult to generate sufficient organic revenue and profit growth to satisfy their shareholders and are therefore looking towards acquisitions to deliver growth, while at the same time they are making use of historically low interest rates and ready availability of debt financing to fund deals.

Increasingly, we are also seeing a “me too” effect – one player in an industry does a deal, putting pressure on others in the space to get busy too. The agrichemicals sector, long considered sleepy by advisers, has certainly been affected by this trend: after years of inactivity, some of the largest global players currently appear to be involved in some sort of dealmaking or at least talking about it.

But what does this all mean for M&A activity in 2016?

No sign of an M&A recession, yet

The latest Intralinks DFP figures show that global early-stage deal activity in Q4 2015 increased by 8.1 percent, a faster rate of growth compared to the previous quarter’s 5.2 percent increase. Our predictive model suggests that this will translate into announced deal volume growth of between 1.5 and 6 percent in 1H 2016 compared to 1H 2015, with the mid-point of our forecast suggesting3.5 percent growth. This is certainly slower than the growth rate for 2015, but does not indicate that the M&A boom we have witnessed over the past two years is coming to an end in the next six months.

While it is too early to tell what the full year 2016 will bring, the Fed’s decision to raise the target range for its key interest rate by 0.25 percentage points on December 16th, the first increase for nine years, and the likely path of further gradual interest rate rises in 2016 could well have a dampening effect on M&A activity levels this year.

China – the new “known unknown”

What is clear, however, is that economic and financial events in China – from its contribution to global economic growth to its impact on equity and currency markets – are having an increasingly influential effect on the rest of the world. This heightened sensitivity of the global economy and global risk assets to Chinese policy is a relatively new phenomenon: China has become the new “known unknown,” an unquantifiable risk that will have an impact on everything, no matter what else is going on.

We saw this in the summer of 2015 when the meltdown of Chinese stock markets caused equity markets across the world to plummet in its wake. The impact of the Chinese market correction on M&A activity, however, was short-lived. It merely shook confidence and made dealmakers, especially in NA and APAC (as we reported in the previous edition of the Intralinks DFP) take their foot off the accelerator pedal for a short period of time. However, 2016 has gotten off to a worrying start: a 7 percent plunge in Chinese equity markets on the first trading session of the New Year, following weak manufacturing data, triggered the so-called “circuit breakers,” which suspended further trading for the rest of the day. That move sent global stock markets reeling. A second 7 percent fall three days later, which again resulted in a market suspension, has contributed to the worst start for global equity markets in decades: as of January 19th, the FTSE All World $ Index is down by 8.7 percent in 2016, while the Shanghai Composite is down 15 percent.

Compounding investors’ fears are seemingly hapless missteps by Chinese policymakers as they seek to control the Chinese economy and markets and the sense that they actually can no longer control the economic and financial gyrations of the world’s largest economy (when measured by the quantity of goods and services produced). A depreciating Renminbi, another feature of the recent China slowdown, also has the potential to export deflation around the world as the prices of Chinese goods become cheaper, and could also negatively affect other emerging markets, which could be forced into currency devaluations in order to remain competitive. The result would be an increase in debt defaults by emerging economies, as the cost of servicing debt denominated in foreign currencies increases.

Much has been made of the slowing of the Chinese economy. However, while everyone seems to know it’s coming, everybody also seems to be surprised when figures are released confirming just that. A Chinese economic slowdown will be felt in many different ways: weaker than expected economic growth will hit demand for commodities, such as coal, oil and metals, as well as finished goods such as machine tools from countries dependent on exports to China. Countries in the firing line of this slowdown include commodity exporters such as Australia and Brazil, and capital goods exporters such as Germany. Neighbouring countries like Japan and South Korea, with supply chains integrated into the Chinese economy, will also be affected. Offsetting the effects of a slowdown and Chinese-led deflation should be an increase in global consumer demand, as the relative prosperity of consumers rises due to the lower prices of Chinese goods.

While the effects of a Chinese slowdown on the global economy are reasonably predictable and a case can be made for offsetting benefits, the biggest danger to economic growth and markets could be from a sudden drop in confidence – confidence by companies to invest and do M&A deals and confidence by consumers to spend. Confidence lies at the heart of the global economic and financial system. It was primarily a spiral of declining confidence by consumers, depositors, investors companies, banks and financial market counterparties that was the root cause of the recent global financial crisis. Once confidence is weakened or disappears, the effects on the global economy, banks and markets can be devastating. As Walter Bagehot, the 19th Century editor of The Economistnewspaper remarked in his masterwork Lombard Street: “the peculiar essence of our [financial] system is an unprecedented trust between man and man: and when that trust is much weakened by hidden causes, a small accident may greatly hurt it, and a great accident for a moment may almost destroy it.” The coming months will show whether the jitters that China is sending through the global economy and financial markets are a “small accident” or harbingers of a greater one.

Asia Pacific – contrasting fortunes, Australian woes and Japanlooking to buy

In APAC, the latest Intralinks DFP data indicates a region with contrasting fortunes. Japan and South East Asia appear to be mostly unaffected by the market volatility and economic bad news coming from China – early-stage deal activity has increased in these two regions by 55 percent and 11 percent, respectively, in Q4 2015, indicating that continued strong growth in M&A deal announcements can be expected in 1H 2016; North Asia and South Asia appear set for an increase in deal announcements in Q2 2016, following a flat or declining Q1 2016 – early-stage deal activity has increased in these two regions by 21 percent and 14 percent, respectively, in Q4 2015; Australia appears to be the hardest hit, with early-stage M&A activity declining by 18% in Q4 2015. Dealmaking in Australia has historically been skewed to the metals and mining sector and heavily reliant on Chinese inbound M&A activity. A combination of the steep falls in global commodities prices and a slowing Chinese economy will, we believe, contribute to a decline in Australian M&A deal announcements in 1H 2016 compared to 1H 2015.

In APAC, Japan is the place to keep an eye on. Japan’s Nikkei made headlines in 2015 when it snatched the UK’s Financial Times Group out of the clutches of German publisher Axel Springer, the widely-tipped front runner to buy the prize-asset from owner Pearson. The speed with which an agreement was reached and the financial firepower behind Nikkei’s offer took the market by surprise and showed a far more confident and bold approach to dealmaking than we have seen from Japanese buyers in recent years. Other impressive moves from Japanese players in 2015 have included insurer Tokio Marine Holdings' Q2 2015 acquisition of Houston-based HCC Insurance Holdings for US$7.5 billion and Japan Tobacco’s Q3 2015 acquisition of the Natural American Spirit business of US-based Reynolds American for US$5 billion. With the volume and value of announced Japanese outbound M&A deals in 2015 at record highs, there are clear signs that Japanese players are not yet done when it comes to global growth aspirations. Domestic and inbound M&A activity in Japan also looks set to remain strong: early-stage M&A activity tracked by the Intralinks DFP jumped by 55 percent in Q4 2015, following a 21 percent rise in Q3 2015. Dealmakers may be betting that “Abenomics” – the monetary and fiscal stimulus program named after Japan’s prime minister, now in its fourth year – may have an impact in 2016 on pulling the Japanese economy out of its deflationary slump and raising its growth rate to the target 2 percent rate.

Latin America– making a comeback

Meanwhile, the Intralinks DFP figures for LATAM, while down from the 48.6 percent jump in Q3 2015, are still positive with 7.4 percent growth in Q4 2015. The impressive uptick in LATAM early-stage M&A activity in H2 2015, following a run of weak or negative growth during the preceding six quarters, indicates a renewed interest in the region from dealmakers. Given the dire economic projections for Brazil, the continent’s largest economy, this suggests that dealmakers are taking a long-term view and looking to make investments that will fit with their long-term strategic objectives, regardless of short-term economic fundamentals.

We believe that when looking at emerging markets such as LATAM, investors will have to reject short-termism and instead be willing to take a long-term view if they are to ensure success. This is particularly applicable to dealmakers from Asia, especially China, whose state-owned enterprises appear more willing to make these kinds of trade-offs. In essence, dealmakers seem willing to ignore bad economic news for the region today and are positioning themselves for the expected recovery in the region over the longer term.In addition, changing demographics, along with an emerging middle class with increasing disposable income, make LATAM an increasingly attractive investment destination, particularly for Consumer Products players.