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State of the market Q2 2018

M&A monitor

Year of the bull

The current bull run for M&A shows no signs of slowing, with the Financial Times even going as far as to call the market ‘unstoppable’. Total values were $1,017bn in Q2, meaning that deal-making in the first six months of 2018 hit an all-time high. Once again the technology, media and telecoms sector is the most active and it will be further boosted by the US courts’ decision to approve AT&T’s $85.4bn takeover of Time Warner.

Deal-makers driven to put people first

It may be a cliché to say that people are a company’s greatest asset, but it’s true that employment issues are as important as ever in the deal process. Buyers of businesses that rely on large volumes of low-wage labour (eg retail/consumer) are having to analyse carefully the impact of political forces that seek to limit immigration and calculate how to refl ect the increased operational risk in asset valuations.

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Buyers go direct to sidestep auctions

Research from Investec suggests a 71 per cent rise in bilaterals last year, with JAB’s recent direct deal for UK sandwich chain Pret A Manger just one example of the trend. More bilaterals could be a consequence of an increasingly aggressive market in which hostile approaches are never far from the headlines (see Qualcomm/Broadcom and Melrose/GKN, the first genuinely hostile UK bid in a decade).

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Why US rate rises won’t stop the boom

It’s a sign of how buoyant the market has become that regulated US banks are now competing to back buyouts at multiples not seen since the run-up to the financial crisis. In 2013, US regulators issued guidelines to prevent financial institutions from funding deals at more than 6x EBITDA. But since Joseph Otting, Comptroller of the Currency, announced in February of this year that banks ‘could do what they wanted’ as long as it didn’t ‘impair their safety or soundness’, they have been moving back in alongside unregulated capital providers at the riskier end of the market (Reuters recently reported some regulated institutions offering debt packages at up to 7.75x EBITDA).

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Xerox/Fuji — don’t copy this

It’s a rare deal in which the leaders of a high-profile public company exhibit behaviour so extreme that a court rules they likely breached their fiduciary duties. And it’s even more unusual when a court finds that an M&A counterparty aided and abetted their misconduct. But that’s just what a judge in New York found in the conduct surrounding Xerox’s proposed business combination with Fuji. The activist titan Carl Icahn – Xerox’s biggest shareholder – was keen on an all-cash sale, following the trend for activists to be an increasing driver of deals (see graph – 78 per cent of M&A-related campaigns this year have advocated transactions rather than tried to block them).

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What can we learn from AT&T/Time Warner?

Speculation that the AT&T/Time Warner decision would unleash a wave of M&A outside media and telecoms seems wide of the mark. After all, a US federal judge deciding that a vertical tie-up is good for competition supports 40 years of received legal and economic wisdom (the DoJ last litigated a vertical deal in 1977 and lost that, too).

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