Year of the Mega-Deal
Merger and acquisition activity is off to a strong start in 2017 thanks to favorable economic conditions, marketplace dynamics, strong balance sheets and perceptions of a favorable regulatory climate.
Since January, British American Tobacco agreed to acquire Reynolds American Inc. for $49.4 billion, Johnson & Johnson announced a $30 billion deal to acquire Swiss drug maker Actelion and Reckitt Benckiser announced a $17.9 billion deal to acquire Mead Johnson Nutrition. And Kraft Heinz dropped a bombshell when it announced a $143 billion unsolicited offer for Unilever. That offer was quickly rebuffed by Unilever and subsequently withdrawn, but it offered a clear indication that there is an appetite for large transactions.
SOURCE: KPMG Market Pulse Survey of 94 corporate and private equity deal leaders in the U.S. across all industries conducted Oct. 2016.
By contrast, the largest deal in the retail and consumer goods world during 2016 was Danone's still pending $12.5 billion acquisition of Whitewave Foods. In fact, 2016 was a bit of a down year in terms of total deal value even though there were more transactions. Total deal volume increased 19 percent in 2016 compared to the prior year, which saw the retail and consumer sector comprise approximately 12% of total U.S. deal volume compared to 10% in 2015, according to an analysis by PwC. While volume was up, deal value in the retail and consumer sector declined 56 percent to $111.9 billion in 2016 from $251.6 billion in 2015. The key reason why was fewer mega-deals, defined as transactions exceeding $1 billion, with the most notable being Heinz' $53.1 billion deal to acquire Kraft in 2015 just two years after Heinz was acquired by Berkshire Hathaway and 3G Global Food Holdings. As a result, PwC data show there were 28 mega-deals with a total value of $73.2 billion in 2016 compared with 32 mega-deals totaling $216.1 billion in 2015. The three mega-deals announced by the midpoint of February this year are worth roughly $100 billion.
"While the new presidential administration's impact on trade and regulatory change is uncertain, factors such as innovation, competition, cross-border deal interest and the availability of cash reserves bode well for deal activity in 2017," according to Dominic Ricketts, PwC's U.S. Retail and Consumer Products Leader. A similar view is held by Dan Tiemann, the U.S. Lead for Deal Advisory and Strategy at KPMG, who also sees an appetite for smaller deals.
"The fundamentals for a strong deal market continue to persevere, with corporates holding record amounts of cash and interest rates remaining historically low. The C-suite recognizes that acquisitions can enhance their current business models and platforms and reduce the time to market," according to Tiemann. "We anticipate smaller, technology acquisitions to wrap around all industries. Technology is key to driving growth for all organizations in today's disruptive environment; it's needed to expand capabilities, products and services."
A recent KPMG survey of 94 corporate and private equity deal leaders in the U.S. across all industries showed two primary motivations for deal-making: 40 percent of those survey cited limited organic growth options and 25 percent cited the need to address business model transformation occurring throughout all types of industries. Both of those factors have been evident in the market for several years with large established brands facing increased competition from retailers' private brands and upstart brands that were born online. Other factors driving deal activity in 2017, according to the KPMG survey, include availability of credit (17 percent) and large cash reserves (14 percent). As for factors expected to inhibit deal activity, survey respondents cited a slow growth environment (32 percent), a lack of suitable targets (28 percent), record stock prices (12 percent) and regulatory considerations (5 percent).
EY's 15th US Capital Confidence Barometer also shows deal intentions are at an all-time high going into 2017, with 75 percent of U.S. executives surveyed planning an M&A transaction in the next 12 months, greatly surpassing the long-term average of 45%. Large U.S. public companies have more than $3 trillion in firepower to execute on M&A strategies, according to EY.
"Mega-deals are an enduring strategy for inorganic growth, as large companies can quickly broaden their business models by entering new markets with established distribution networks and strong customer bases," according to Bill Casey, EY Americas Vice Chair, Transaction Advisory Services. "Megadeals will become increasingly complex as companies navigate an ever-changing regulatory landscape, but we are confident management teams will face these hurdles head on to achieve transformational growth."
EY has characterized 2017 as the year of the "genetically modified organization" because the firm also believes companies will seek to alter their corporate genetics through M&A.
"The year of the 'genetically modified organization' encapsulates our expectation that companies will continue to use highly targeted, precision deals to alter their genetic makeup, often at the molecular level, to future-proof their organizations and help innovation keep pace with the rapid change affecting all industries," according to Casey. "Executives have an appetite for transformation and diversification and we anticipate 2017's deal numbers will reflect the need to transact for survival, adaptation and growth."
Accordingly, U.S. companies will increasingly turn to M&A as a solution, with nearly all of the executives EY surveyed who are planning a transaction in the near term focused on deals under $1 billion.
New M&A Thinking at FTC
Retailers and consumer goods companies considering mergers and acquisitions should familiarize themselves with the concept of "regulatory humility" espoused by newly appointed Federal Trade Commission Chairman Maureen Ohlhausen.
President Donald Trump appointed Ohlhausen to that role during his first week in office, a move that signals a shift in how the Commission views proposed deals that could have huge implications for the retail industry. She served on the Commission since being appointed by former President Barack Obama in April 2012, when he was obligated to appoint a Republican since only three of the Commission's five members are allowed to be from the same political party. Prior to FTC, Ohlhausen was a partner at Wilkinson Barker Knauer, where she headed the firm's FTC practice focusing on privacy, data protection, and cybersecurity matters. Prior to that, she spent 11 years in various staff roles at the FTC.
During the past five years on the Commission, Ohlhausen often dissented from the majority and has made it clear that under her leadership the Commission will pursue a new direction and think differently about competition. Her views on these subjects were shared in an essay in the February edition of The Criterion Journal on Innovation titled "The Federal Trade Commission's Path Ahead." In the piece, Ohlhausen noted that she planned to continue the agency's good work to protect competition while advancing principles that the FTC overlooked or undervalued under the Obama administration.
"I believe in the power of markets — when free of restraints and unnecessary regulations — to provide the best outcomes for consumers. Antitrust enforcers guard the competitive process. We intervene when firms injure competition, and we advocate for consumers when governments consider anticompetitive legislation," Ohlhausen wrote. "But equally important is knowing when not to intervene. Importantly, competition enforcers should not intervene simply because they dislike certain market outcomes. Antitrust is about protecting the process, not guaranteeing a particular result at a particular time."
That thinking is at the root of the concept of regulatory humility Ohlhausen had written and spoke of prior to her appointment as chair of the Commission.
"My record shows that I favor meritorious intervention. But, I believe, it is critical to wield our competition laws with regard for the limits of our knowledge, the risk of getting it wrong, and the relative costs to society of over-enforcement and under-enforcement," Ohlhausen explained. "Those considerations inform my lodestar of 'regulatory humility,' which I will follow in the months ahead."
In one of the more telling lines from her submission to the Journal, Ohlhausen offered the following assessment: "Arguably the most destructive restrictions on competition flow from the government. Put simply, government regulation is the barrier to entry that may never fall."
Ohlhausen's full article can be found at www.criterioninnovation.com