Canadian Underwriter

Global acquirers underperformed in the second quarter: Willis Towers Watson

June 23, 2017   by Canadian Underwriter

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The global mergers and acquisitions (M&A) market underperformed in the second quarter of 2017, as Europe M&A bucked the trend and market volatility and economic uncertainty depressed performance in North America and Asia, according to Willis Towers Watson’s (WTW) latest Quarterly Deal Performance Monitor (QDPM).

While the three-year rolling average performance for global acquirers remained a healthy 5.6 percentage points (pp) above the MSCI World Index, performance in Q2 2017 was 3.9pp below – the lowest recorded result since the study began in 2008, WTW said in a press release earlier this week. The MSCI World Index is a broad global equity benchmark that represents large- and mid-cap equity performance across 23 developed market countries, including Canada and the United States.

The QDPM research for Q2 2017 includes deals completed between April 1 and June 13 of this year. WTW, a global advisory, broking and solutions company, said that it anticipates the current number of deals of 183 to increase by approximately 15% to 20% by quarter end, which ends on June 30.

The research, run in partnership with Cass Business School in London, U.K. – which tracks the number of completed deals over US$100 million and the performance of share price of the acquiring company against market indices – showed European acquirers to be the stand out dealmakers during an otherwise muted second quarter, WTW said in the release. They returned a market outperformance of 1.8pp above the index compared to -4.2pp the previous quarter.

Acquirers in North America achieved a more modest increase in outperformance of 0.9pp, with 96 deals closing in Q2 2017. However, acquirers from Asia-Pacific showed a sharp decrease from the previous quarter, with an all-time low underperformance of -8.4pp. In the three-year rolling analysis, Asia-Pacific acquirers are still in the top spot due to consistent over-performance in the last few years, 24.2pp above their regional index, followed by European and North American acquirers, which have outperformed their regional indexes over the same period by 5.4pp and 1.2pp, respectively.

“Europe dealmakers have successfully bucked the global downward trend, perhaps driven by upbeat economic and stock market conditions,” said Jana Mercereau, WTW’s head of corporate mergers and acquisitions for Great Britain, in the release. “The marked drop in performance in other regions, notably Asia, reflects the market’s reaction to greater regulation from governments including the Chinese scrutiny on outbound capital flow and the U.S. national security measures. However, it’s worth noting that despite this quarterly drop, in taking a longer-term view, acquirers are continuing to track well above market indices, maintaining a strong return on the deals that have closed.”

Following a slow start in the number of deals closed in the first half of the year, acquirers of the 183 deals completed so far in Q2 2017 underperformed the market for almost all deal types compared to the corresponding quarter of 2016. There was also a marked decline in the volume of mega deals (worth more than US$10 billion), with only two completed in this category.

“After an unpredictable political cycle and an equally unpredictable M&A environment that ended with a burst of activity in the last quarter of 2016, it is perhaps no surprise that deal volumes appear to have recently plateaued,” Mercereau said in the release. “However, the M&A community holds a more optimistic outlook on deal-making for the second half of the year, bolstered by an abundance of capital available at historically low rates coupled with a U.S. administration that is still widely viewed as a boon for M&A deals.”

For the research, analysis was conducted from the perspective of the acquirer; share-price performance within the quarterly study is measured as a percentage change in share price from six months prior to the announcement date to the end of the quarter; all deals where the acquirer owned less than 50% of the shares of the target after the acquisition were removed, meaning no minority purchases have been considered; and all deals where the acquirer held more than 50% of target shares prior to the acquisition have been removed, so no remaining purchases have been considered.

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