Back to School: Brexit, U.S. vote shouldn’t much hurt 2nd-half M&A, EY says

The second-half outlook for private equity merger activity is “bright,” coming off a tough first half and buoyed by stockpiles of cash available for investment, a report from a key consulting firm said.

More broadly, EY said in its midyear M&A survey, U.S. dealmaking showed “remarkable resilience” in the first half and shouldn’t be “materially [curtailed]” by either Britain’s late-June decision to exit the European Union or the coming U.S. presidential election in November.

For all of 2016, broad M&A deal value will probably come up short of 2015 but will be the second-best year since 2007, before the global financial crisis, EY said.

In 2015, PE firms did deals at “breakneck speed,” said Bill Stoffel, leader of private equity at Ernst & Young LLP, in the report. That 2015 rush plus “challenging” debt markets in first-quarter 2016 led to a 22 percent drop in the total number of PE deals in 2016 through the end of May, to 254 from 327 a year earlier, EY said.

PE deal value in 2016 through the end of May still rose 17 percent from a year earlier, to $48.1 billion, EY reported.

Where is PE nosing around? “PE is eager to jump into the oil and gas industry,” Stoffel said. “While we haven’t seen a tremendous amount of deals in the space, major players are raising sidecar energy funds from investors.” Deal values in the sector have more than doubled from a year earlier, “as firms slowly begin to put assets to work in the space,” he said.

A few large deals in power generation may portend more activity in the sector, Stoffel said. And healthcare and tech will draw funding “given the shifting demographics as baby boomers get older,” he said.

Dry powder — available cash — at US buyout firms grew 12 percent in the first half, to a record $290.8 billion from $260.4 billion at year’s end 2015. EY expects a second-half “buying spree” as firms put that money to work, Stoffel said.

US PE-backed initial public offerings dropped 55 percent in the first half of 2016, and IPOs probably won’t rebound until after the U.S. presidential election, he said.

Within broader M&A, life sciences anchored first-half activity, and EY sees it as the sector to watch. The two largest U.S. deals in the first half were Shire’s acquisition of Baxalta and Abbott’s acquisition of St Jude Medical, EY said.

Overall M&A activity should benefit from a number of developments, including, among others, China’s search for U.S. deal opportunities and activist investors’ pressure on corporate boards to use M&A as a way to secure value for holders, the report said.

Other factors potentially boosting the broad M&A effort for the second half include:

• slow global economic growth, which could pressure companies’ revenues. That in turn could prompt companies to pursue mergers for growth;
• distressed-asset sales, particularly in oil and gas, and;
• divestitures, in the face of pressure from regulators and activist investors.

Photo courtesy ©iStock/James Brey