The Deloitte M&A Index 2016
Opportunities amidst divergence
The Deloitte M&A Index is a forward-looking indicator that forecasts future global M&A deal volumes and identifies the factors influencing conditions for dealmaking.
Key highlights in this edition
- The economic conditions in 2016 were markedly different from that of 2015. Several factors have contributed to a global slowdown, led by a slowdown in China growth and weakening of its exports, weak commodity prices, subdued growth in both US and EU zone, volatile stock markets and finally the shock result of EU referendum vote in UK and the immediate aftermath.
- On the other hand, many of the conditions that led to M&A boom in 2015 such as ultra-low interest rates, relatively strong dollar and record cash reserves mirror weak profit outlook and challenging growth conditions for the corporate sector. European companies’ profits were down 11% over last year, while US corporate profits are down around 3%. Despite this, S&P 500 touched new highs for 2016 recently and trades at multiple of 18 times forward looking earnings, the highest since 2002, putting further pressure on CEOs to justify high valuations. It is therefore likely that M&A will remain a key corporate response.
- As the result, global M&A volumes in H1 2016 remained broadly at similar levels to H1 2015, which is obviously a positive and it was largely down to the corporate sector, whereas private equity deals fell by 7%. At the same time, deal values dropped sharply from $2 trillion to $1.4 trillion during the first halves of the year, particularly hit were the mega-deal segment which halved from $735bn to $307bn.
- Cross-border deals are a major feature of this M&A wave. More than $1 trillion worth of cross-border deals have been announced so far this year, of which a third were in the vibrant deal corridor between North America and Europe. New corridors have started emerging between Asia and Europe, led by China and Japan and we expect these two countries to be prominent players in the coming months.
- Companies are committing to deliver annualized cost synergies that represent, on average, 3-4% of the transaction value. If all announced cost synergies are realized and sustained, they could add an estimated $1.5-1.9 trillion to the value of these companies. We can assume that delivering these synergies will be high on boardroom agendas.
- Half way through 2016, concerns over global growth are back, along with divergence in economic, monetary policies and political uncertainties. Looking ahead, such divergence will create M&A opportunities and define deal making in 2016 and beyond.
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