_The M&A boom and its impact on global real estate markets

There can be no doubt that it has been a golden period for corporate mergers and acquisitions (M&A) worldwide during the past five years.

Data from Dealogic, a financial analytics firm, shows that more than $18 trillion worth of corporate transactions have taken place since 2013. In fact, dealmaking during 2016 and 2017 was so high they now rank among the top five most active years on record in terms of M&A volumes.

There is no sign of a let up in activity yet either. Thomson Reuters, the information group, reports that $2.5 trillion of corporate deals have been announced in the first six months of 2018 alone, in the strongest first half for M&A since its records began in 1980.

It added that an all-time high of 81 ‘mega deals’, those with a value greater than $5 billion, had been agreed during the first half, accounting for half of the total M&A during the period.

It is heady stuff. As Ben Collins, a Strategy Director from Intralinks, a provider of virtual M&A data rooms, says: “The ongoing boom in global M&A activity coupled with valuations reaching such multi-decade highs means that it’s a seller’s market: almost anything can be sold and usually for very good money.”

However, the question on everyone’s lips is whether this appetite for corporate deal making is here to stay or could a cyclical downturn be looming on the horizon?

Harry Hampson, Chairman of JP Morgan’s EMEA industries coverage group, says a number of factors have been driving the recent M&A boom, including very low interest rates and ready availability of capital. “The relatively cheap finance has made the maths work in many cases.

"Investors in publicly-listed companies have, on the whole, also been quite supportive of management teams doing M&A transactions, which has resulted in more confidence in boardrooms when making strategic investment decisions,” he explains.

“Whether that will continue in the coming years is the question everyone is asking and, for the time being, I think it will. Interest rates will steadily rise for the next five years, but from a very low base, and even in a rising interest rate environment there will be capital available for deals, which makes a difference. I think the ingredients are still in place for continued activity.”

Sectors that are expected to attract the most corporate activity in the next three to five years include technology, media and telecoms and healthcare.

These two industries have already collectively attracted nearly $4 trillion worth of deals since 2013 to the year to date and Michal Berkner, an M&A Partner at Cooley, the law firm, expects this to continue: “These two sectors have been at the top of the M&A billboards for several years and will likely hold onto their pole positions as companies in these sectors consolidate, keep pace of technological and clinical developments, seek to remain relevant and look to buy growth at levels that are difficult to achieve organically.”

Financial services – the only sector not to have fully rebounded to pre-crisis M&A levels because of tough restrictions by regulators, according to Andrea Putaturo, Head of Research for EMEA at Mergermarket – is also likely to pick up in the coming years.

Unlike their American counterparts, European banks still have to solve their capital constraints which could trigger consolidation both domestically and cross-border.

Rising oil and commodity prices, following a tough few years where the oil price languished, is also likely to lead to greater confidence and deal-making among large global oil and gas companies.

Philip Whitchelo, Vice President of Strategic Business Development at Intralinks, says its data insight shows that the strongest growth in corporate transactions during the next six months and beyond could come from the real estate, TMT and industrials sectors.

Intralinks provides virtual data rooms for companies that are preparing a sale, enabling data teams on both sides of a transaction to exchange information securely.

The data rooms are often set up at least six months in advance of a deal taking place, which means Intralinks can track early stage M&A and accurately forecast increases in activity.

However, while it may be easy to pick out some industries that are obviously ripe for further consolidation, bankers and M&A advisers as a whole say they expect activity across the board, particularly in sectors experiencing technological disruption.

Angus Hodgson, an M&A Partner at AT Kearney, a global management consultancy, says “digital transformation journeys” will be one of the key trends driving M&A of the future: “The relentless rise of digital is rapidly reshaping the traditional M&A landscape with blue chip players now vying for tech targets to shore up their digital capabilities.”

Ms Berkner at Cooley agrees with Mr Hodgson but says digital transformation is not the only driver. She says there are a host of dominant trends motivating board directors worldwide, including “unprecedented levels of liquidity in corporations and private equity ‘dry powder’, industry consolidations, high growth and diversification opportunities that are difficult to achieve organically, bolt-on acquisitions, economies of scale and financings on favourable terms.”

In the UK, Brexit is expected to be a catalyst for deal activity while JP Morgan’s Mr Hampson points out the growing desire to create “regional champions” in specific industries, particularly in the telecoms and consumer space.

“It is important to remember too that a lot of companies are trading at relatively high multiples and in order to continue to support those valuations they need to generate growth, which can be easier to achieve through M&A than organically,” adds Mr Hampson.

“There is a certain desire to continue to deliver growth to investors and whether that is through horizontal or vertical M&A there are synergies that can help create a strong market position.”

Regulators worldwide are also flexing their muscles, changing how they look at market definitions, and all eyes are currently on the European competition watchdog’s treatment of Vodafone’s €18 billion swoop on Liberty Global’s cable networks business.

However, while most M&A experts are forecasting relatively benign conditions some are concerned the corporate M&A market is overheating.

Intralinks’ Mr Whitchelo say he believes the market is already nearing a cyclical peak as valuations hit record levels, global equity markets remain below their January 2018 high, and amid the growing threat of a full-blown international trade war between the US, China and the EU, increasing protectionism around the world, and the growing probability of a disorderly Brexit.

JP Morgan’s Mr Hampson says that market corrections can never be ruled out but concludes: “We are optimistic that we should have a busy few years ahead of us; I am slightly fearful for the UK because of Brexit, but hopefully we will continue to see activity."

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