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Did Europe’s M&A Activity Ever Recover After a Slow Start in 2019?

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Mergers and acquisitions in Europe dipped in Q1 of 2019.

The looming threat of Brexit played a major role in slowing deal activity, and anti-competition rulings added to market concerns. While a lack of confidence led to many corporations sitting on their hands, private equity has seen its influence grow, with investments reaching record levels.

In this article, we examine what movement, if any, we’ve seen regarding a recovery in Q2 and Q3. The data points we’ve highlighted come from Mergermarket’s Global & Regional Merger and Acquisition reports, unless otherwise noted.

Q1 Recap

In the first quarter of 2019, European M&A sunk to its lowest value since Q3 of 2012. In the U.K. specifically, a total of $35.2 billion was spent on assets, making it the lowest quarterly value since the remain/leave referendum in June of 2016.

None of the first quarter’s 10 largest global deals targeted Europe, and no takeovers above $10 billion were announced in the continent. Europe’s largest deal in Q1 was ZF Friedrichshafen’s acquisition of Swiss brake technology manufacturer WABCO for $7.2 bn.

“Despite holding record levels of dry powder, European firms have slowed buying as the continent’s top economies flirt with recession and Britain remains mired in uncertainty over Brexit,” Dion Rabouin wrote for Axios Media.

Boardroom confidence in pursuing blockbuster deals also took a hit after the proposed merger between Siemens and Alstom was blocked due to competition concerns. According to CNBC’s Silvia Amaro, both the German and French governments had supported the merger, believing the deal would’ve been a good counter to the economic rise of China.

In contrast, private equity was one area that remained strong. In fact, according to financial services company Robert W. Baird & Co., the U.K. remained the most active private equity market in Europe, with more than 40 majority-stake buyout deals in Q1. France saw 26 deals.

The hope toward the end of the quarter was that improvements in the political and regulatory climate could boost M&A activity in the following months. However, at its conclusion there was no definitive direction in regard to Brexit, and the EU seemingly doubled down on it’s protectionist sentiment.

In March, a foreign investment screening framework was approved, aimed at “safeguarding Europe’s security, public order and strategic interests.” This new legislation will take effect October 11, 2020, and “marks the first time that the supra-national body has taken a coordinated approach to the vetting of investment from outside the EU on security and public order grounds across EU Member States,” according to Allen & Overy’s Q1 M&A report.

 

Continued Uncertainty in Q2

In the second quarter, the majority of deals worth more than $10 billion took place in the U.S. Of the larger deals targeting Europe (valued above $5 billion), two were conducted by private equity firms. These included EQT’s acquisition of Nestle’s skin health division for $10 billion. The second largest acquisition was KKR’s $5.6 billion deal with Axel Springer.

The Biggest M&A Deals

AbbVie’s acquisition of Irish Botox manufacturer Allergan was a market highlight. The deal, valued at $63 billion, was one of the largest deals to target Europe since the crisis, second only to the 2015 SABMiller and Anheuser-Busch InBev merger.

For AbbVie, Europe’s market volatility could actually amount to long-term gains. Stefan Redlich, at Seeking Alpha explains: “It is these times of maximum uncertainty and buyer capitulation which tend to generate this biggest long-term returns, particularly if you are starting with a very high initial yield and a juicy dividend which is expected to grow.”

However, in general, confidence to invest in European assets continued to decline, and uncertainty resumed. At the end of the quarter, $391 billion was spent on such assets across 3,223 deals. This put investment within the continent down 38.8% compared to the equivalent period last year ($638.9 billion).

“Europe is lagging behind, and while U.S. companies are doubling in size, their European counterparts risk losing their competitive edge,” said JPMorgan Chase Global M&A Co-Head Hernan Cristerna.

Even Germany, a generally stable market, experienced a slowdown in Q2. Deal Dynamics data shows that the value of inbound investment fell by 68% in Q2 2019 when compared with the same quarter last year.

“Part of this slowdown can be attributed to foreign investors focusing on their less stable home markets and being more selective when pursuing cross-border M&A opportunities as a consequence,” the team writes.

Stalled Deals and Skepticism

There were also a significant number of failed deals during Q2, which seemed to define the quarter. The tie-up of automakers Fiat Chrysler Automobiles and Renault, for example, failed amid political resistance and concerns over regulatory scrutiny. The deal between Deutsche Bank AG and Commerzbank AG also met a similar fate.

A figure that Jens Kengelbach et al. at Boston Consulting Group included in its 2019 M&A Outlook illustrated just how skeptical European investors have become about dealmaking in Europe. “Sunrise Communications Group’s stock price declined by more than 8% after it announced the acquisition of UPC Switzerland, a Switzerland-based cable operator, from Liberty Global,” says the report.

As a result of such skepticism, European corporates turned elsewhere to find growth. Investments outside of Europe increased significantly, which is a trend that we’ll see continue into Q3. Mergermarket describes this trend as “just as damaging as the severe lack of inbound activity.”

To further illustrate this point, outbound activity reached $74.1 billion (210 deals), which was the highest quarterly value since 2017’s fourth quarter ($78.4 billion). The majority of European outbound M&A targeted the U.S., which received a 70.4% share by value in the last three months.

The highest valued outbound deals for Europe included Germany-based Infineon $10 billion acquisition of Cypress Semiconductor and the $5.7 billion tie-up between France-based Dassault Systemes and Medidata Solutions.

While European M&A did experience a downturn, for a number of companies (particularly those in the technology and services sector) the potential opportunities outweighed Brexit-related threats. According to PwC, many companies actually believe that now is an opportune time to secure an operational presence in the EU. With the future uncertain, investing in Europe now could prevent them from facing challenges later.

At the conclusion of the second quarter, some were hopeful that future access to European markets and talent might continue to make U.K. acquisitions more attractive to overseas parties.  Currency movements were also working in favor of foreign investors. And, for the most part, that does seem to have been the case.

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Signs of Recovery in Q3?

M&A between European parties fell further in Q3, with value down 29.4% versus 2018 YTD. This was balanced out only by the private equity market, which remained robust.

The largest M&A investment made by a European company was EssilorLuxottica’s acquisition of GrandVision for $8 billion. Mergermarket notes that the deal is one of a number in the retail and leisure spaces announced in Q3 that pointed to defensive consolidation in under-performing sectors more severely exposed to an economic downturn.

Takeovers by Chinese reached the lowest YTD value since 2013 (4.5 billion) as political pressure slowed dealmaking. This put Chinese investment down 60.9% in spending versus the equivalent period last year.

Foreign Inbound Investment

Even though global inbound foreign investment is down, it remains strong. In fact, foreign investment into Europe is on track to reach one of its highest annual totals on Mergermarket record.

“It is remarkable, and seemingly not a mere coincidence, that 2019 is on track to be the second year since 2016 in which the volume of U.K. outbound acquisition of U.S. targets is larger than U.K. outbound cross-border acquisitions in the rest of the world combined,” says Bloomberg legal analyst Grace Maral Burnett.

Europe also continues to be a key destination for U.S. firms looking to invest abroad, accounting for 67.2% of activity outside the country by value. Outbound deals also appeared to rise, pushing foreign M&A higher, following a slow 2018.

The largest deal in Europe in Q3 was LSE’s $27-billion acquisition of Refinitiv. This was the largest deal from Europe into the U.S. since the $49 bn tie-up between BAT and Reynolds American in early 2017.

Concerns of a Recession

Germany did appear to be moving closer to a recession in Q3.

Senior CNN Business writer Julia Horowitz explained how Germany has been hit by a combination of negative factors: “Germany relies heavily on exporters that sell a large amount of goods to China and the United States, which are locked in a bitter trade dispute. Weak global auto sales have also hit the country’s carmakers, and fears of a disorderly Brexit remain a drag.”

Germany did, however, see an uptick in M&A value in Q3. This was driven by private equity interest in large-cap assets. Buyouts targeting the country have reached $23.4 billion this year, the second highest YTD value on record, only behind 2007 ($27.3 billion).

Predictions for 2020

Concerns about a no-deal Brexit will continue to impact M&A into Q4. So far this year, the increased possibility of a no-deal Brexit has allowed anxiety levels to reach those of 2016, the year that the U.K. voted to exit the European Union.

We’ve seen that in anxious times it appears buyers from the United Kingdom turn to acquisitions in the U.S., which doesn’t appear to be coming to a halt just yet.

Focus Economics predicts that in 2020 risks will stem from the global environment, particularly a sharp slowdown in China and intensification of trade tensions. The report states that GDP growth is seen at 1.1% in 2019 and 1.1% again in 2020.

“Make no mistake — deals are getting done, but the current slowdown is inevitable considering the continuing uncertainty around trade and regulation,” said Ai Ai Wong, Chair of Baker McKenzie’s Global Transactional Group. “We know that around the world, there are many investors and companies with capital on the sidelines, waiting to move forward with domestic and cross-border deals.”

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