Is the global economy on the brink of recovery or the brink of disaster? If merger and acquisition activity is any measure – and most corporate economists think it is – then things are going great guns. When economies slow down or crash, companies stop investing for the future and M&A activity comes to a dead halt. When M&A picks up, it is usually taken as a sign of confidence – whether misplaced or not. Last year was a record year for global M&A, with deal values rising to $4.6 trillion – just above the previous high of $4.3 trillion for the previous peak year of 2007. And many large companies say there is more to come.
But set aside for a moment the question of whether the M&A boom is a sign of confidence or over-confidence. Hidden behind these global figures there is something very interesting going on, and that is that the most significant flow of deals between individual countries is between the US and the UK. Unheralded and almost unnoticed, the US and the UK are becoming ever more entwined as business partners.
Last year the world’s big companies bought and sold assets to each other like never before. The ‘megadeals’ that made the headlines (defined by Thomson Reuters, the leading provider of data on M&A, as deals worth $5 billion or more) were mergers between giants, like the tie-up between energy companies Royal Dutch Shell and BG Group, or drugmakers Pfizer and Allergan. But these very big deals that pump up the figures and make banks and specialist M&A advisors richer by hundreds of millions of dollars are not the whole of the story, or even the most important part of it. The rationale for the biggest deals is often tax advantage or regulatory pressure (both were a factor in the Pfizer-Allergan deal for example), rather than any desire to create new businesses or to integrate operations across borders. For that, we need to look elsewhere.
Total M&A activity is usually broken down by region – and it is true that business restructuring takes place primarily within economies, rather than across borders. Thomson Reuters points out that the US, non-Japan Asia and Europe are the big three M&A regions (despite being the third biggest economy in the world Japan has a very low rate of M&A, something that helps explain why it also has a very sluggish economy).
A more interesting way of looking at corporate deals is on a country basis. When it comes to the buying and selling of corporate assets between countries, the trade between the UK and the US is certainly the busiest bilateral channel and probably the most valuable. ‘Probably’ because all value calculations of M&A are incomplete – many deals take place between private companies which are under no obligation to disclose how much they have paid.
The number of deals is a more reliable indication of cross border investment traffic. On that basis, the UK-US relationship is in fine form. In the last three months alone there were 130 acquisitions across the Atlantic, and almost 500 in the last full year. The US buys UK companies at around double the rate that the UK buys in the US, but based on the deals where value is disclosed the UK seems to be buying more valuable assets. Typical US businesses bought by UK companies and private equity investors are worth almost double the value of UK businesses bought by the US. In the last 12 months UK investors bought $43.8 billion worth of US assets (and a lot more if undisclosed values were added to the total).
It is not difficult to see why this transatlantic investment spree is happening. The companies of the US have more in common with their counterparts in the UK than with anywhere else, and most important of all there is a ready market for quality assets in both economies – something that is not true in many European economies, and certainly not in China or Japan. What is more, the US and UK both have vital and fast-growing technology sectors.
Technology, media and telecommunications – the ‘TMT’ sector – is where most of the action is. Over a third of all transatlantic deals are in the technology sector, and technology dealmaking over the last two and a half years has been worth over $15 billion in each direction. One unmistakeable sign of how important the high-tech sector has become to transatlantic investors is that UK companies now make more corporate investments in California than anywhere else in the US.
Many of these deals are under the radar. You may not have heard of Brimtek (a maker of surveillance systems), or Leftfield (a film-maker), or MedAssets (a maker of healthcare software). You may have missed Binocular (a developer of virtual reality systems), NickelFish (a software developer), Blend (in music streaming), and Mobispoke (interactive purchasing). But they were all among the US technology businesses that UK companies have bought in the last three months alone. Over the last ten quarters there have been over 440 such purchases between the US and UK. Many have been small- to medium-sized deals, in the tens or hundreds of millions of dollars. A few have been a lot bigger, like the $5 billion UK buyout of US data integration group Informatica, or the $4.3 billion purchase of semiconductor maker Atmel.
Whether these M&A deals make business sense is a separate question. The record shows that the bigger a merger is, the less likely it is to succeed: large companies tend to have entrenched cultures that are difficult to integrate. But many of the deals between the US and UK are well below the megadeal size, meaning that post-merger challenges should be surmountable.
One other thing the record shows is that nothing will stop companies doing M&A deals, whether it is easy or not to make them work. It is part of the ‘creative destruction’ that marks industries where confidence is rising, and where companies expect future profits growth. There is little doubt that this is the case in the US and UK, and especially in the technology sector. With deals running at their current rate, it is not too much to say that a new transatlantic high-tech sector is coming into being.
