Investment banking: Is the mega-deal M&A party over?
A string of jumbo strategic corporate deals made 2018 one of the busiest years ever in M&A, but falling equity markets, slowing economies, rising debt costs and geopolitical uncertainties have now dimmed the outlook severely. M&A bankers hope that private equity buyers, with $1 trillion of equity to put to work, will pick up the baton and that activist investors will stop corporate executives from quietly jamming those takeover and disposal plans back into the freezer.
On the last Sunday of October, IBM announced the biggest M&A deal in its history, agreeing to acquire Red Hat, the world’s leading provider of open-source cloud software, for $190 per share. That’s a 64% premium to the target’s previous closing price and values Red Hat at $34 billion, with the consideration to be paid in cash.
IBM has had to suspend its share buyback programme for the next two years to finance the deal from available funds and debt without threatening its single-A rating or the steady dividend policy, for which many retail investors hold the stock, rather like a low-risk utility play.
Refinitiv, the financial data company formerly known as Thomson Reuters, was quick to note that the deal pushed announced global technology M&A in the first 10 months of 2018 up to $422.2 billion, 59% ahead of the same period in 2017.
“Technology developments will continue to underpin M&A across most industries, including autos, industrials, retail, media and telecom,” says Adrian Mee, co-head of global M&A at Bank of America Merrill Lynch. “And these same forces are also driving consolidation within the technology sector itself.”
Pier Luigi Colizzi, head of M&A for EMEA at Barclays, sees this as a big change that has crept up on the advisory business so slowly as to be not fully appreciated.