By Dana Mattioli And Dana Cimilluca
After years in the doldrums, the mergers-and-acquisitions market
came roaring back to life last year. Whether the surge will
continue depends largely on the ability of that recovery to widen
beyond a narrow group of industries that led the charge in
2014.
More than $3.4 trillion of mergers were struck globally last
year, according to Dealogic, as confidence returned to boardrooms
and high stock prices emboldened buyers and sellers. That is the
most since the height of the last deal boom in 2007, when there was
a record $4.3 trillion of transactions. In the U.S., deal activity
surged 54% to $1.5 trillion in 2014.
The year was flush with blockbuster deals, including Actavis
PLC's $66 billion agreement to buy Botox maker Allergan Inc., the
largest of the year; AT&T Inc.'s $49 billion proposed takeover
of DirecTV; and Comcast Corp.'s $45 billion deal to acquire Time
Warner Cable Inc.
But those and a number of the other big-ticket deals in 2014
were confined to the health-care, telecommunications, media and
technology sectors, with other industries that traditionally have
been big M&A contributors lagging behind.
Those areas together accounted for more than $1 trillion of
announced deals globally in 2014, or nearly one-third of total
volume, according to Dealogic. In 2007, they accounted for about
one-sixth of overall volume. Meanwhile, financial companies made up
5.9% of 2014's activity, down from 15% in 2007, as regulatory
pressure and other factors tempered deal makers' enthusiasm.
Some bankers and lawyers who arrange deals for a living say the
ingredients are in place for more industries to join the party in
2015.
Michael Carr, the head of Americas M&A at Goldman Sachs
Group Inc., expects that companies across a wider swath of the
spectrum will face shareholder pressure to do deals that boost
earnings growth as the economy picks up steam and so-called
self-help measures, like share buybacks and cost cutting, run their
course.
"Shareholder expectations about growth are higher than they have
been in a long time," he said.
Another factor that could ignite deal making in other sectors is
that, in bull markets, when one deal is struck it is often followed
by others, as industry competitors react to a changing
landscape.
"The psychology of deal making is that if other people are
striking deals, you better strike them, too. Otherwise, you get
left behind," said Alison Ressler, an M&A lawyer at Sullivan
& Cromwell LLP.
Some deal makers point to the sharp decline in oil prices as
another potential catalyst, as companies whose revenue stands to be
dented by the drop potentially look to find merger partners to help
fortify themselves.
Deal making in the energy sector has recently shown signs of
life. In November, with the crude-price tumble in full swing,
Halliburton Co. agreed to buy rival oil-field-services company
Baker Hughes Inc. for $35 billion. Some advisers caution that more
such deals are unlikely before oil prices stabilize.
Some of the sectors that registered strong gains in 2014 are
expected to keep up the pace in 2015.
So-called convergence among big media and telecom
companies--which are increasingly competing to offer bundles of
data, video and voice services--was a big driver of M&A
activity in 2014, as companies like AT&T and Comcast sought
deals to help position themselves for the new landscape.
"There's been a lot of talk about convergence for 15 years, but
in the last year, it's finally proving to be reality," said Woody
Young, the co-head of global telecommunications, media and
technology at investment bank Lazard. "That's what's driven all
these enormous deals, and will continue to in the future."
Health care may have a harder time matching last year's
pace.
One of the main M&A engines in the sector in 2014 was a move
by companies to improve tax efficiency through deals known as
inversions, in which a U.S. company buys a foreign rival in a move
to redomicile abroad.
Including those that fell apart, more than half of the $648
billion of health-care deals announced in 2014 were inversions,
according to Dealogic. They include medical-device maker Medtronic
Inc.'s $42.9 billion pending acquisition of Ireland's Covidien
PLC.
Deal makers say that pace is unlikely to continue after the
Treasury Department implemented rules that make such deals less
profitable. The new rules already have led a number of planned
inversions to unravel, including AbbVie Inc.'s $54 billion
agreement to buy Shire PLC.
David Benoit contributed to this article.
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