The dollar value of U.S. mergers and acquisitions spiked in the second quarter of the year, despite a host of challenges. Undaunted by a trade war with China, concerns about Brexit, new tariffs and sanctions, and heightened national-security-based foreign investment restrictions, buyers announced an aggregate of $627.57 billion worth of public and private M&A deals, the second-highest deal volume for any quarter in the past decade. In first place, the fourth quarter of 2015 reported an aggregate deal volume of $711 billion.
Twelve mega deals, valued at $10 billion or greater, are the source of the boost in deal volume. Deal volumes for the middle and large markets also increased by 14% and 45% respectively from the first quarter to the second quarter. Second quarter’s record-breaking deal volume marks a 56% increase from the first quarter’s deal volume of $402.15 billion.
The total deal count of 257 (representing deals valued at $100 million or greater) for the second quarter slightly surpassed the first quarter. While this count may be relatively low compared to past years, the high volume in dollars more than made up for it. U.S. targets attracted fewer deals overall, but the deals announced were generally much larger: the average deal size of $2.44 billion for the second quarter represents a significant 37.8% increase over last quarter’s average deal size of $1.77 billion.
The middle market, consisting of deals valued at $100 million to $1 billion, continues to provide the bulk of the deals for the M&A market. Even so, the second quarter proved disappointing, barely improving on last quarter, with the second-lowest number of middle market deals since the first quarter of 2016.
Major Spike in US Mega Deals
For the second quarter in a row, mega deals valued at $10 billion or greater have boosted the aggregate M&A volume and average deal size. Twelve mega deals involving US targets were announced in the second quarter of 2019. With 19 mega deals announced by the middle of 2019, this year has already tied the full-year mega deal count of 2018 and surpassed 2017 and 2016. This quarter beats all but one quarter over the past decade; the only quarter with more mega deals was the fourth quarter of 2015, when buyers announced 14 mega deals.
The twelve mega deals announced in the second quarter together equal a total deal volume of $410.55 billion, with an average mega deal size of $34.2 billion. This total mega deal volume is, like the count, second highest in the past decade, after the fourth quarter of 2015, and represents a 70% increase from last quarter. Interestingly, the second quarter’s average mega deal size of $34.2 billion is nearly the same as the first quarter’s average mega deal size of $34.45 billion.
Mega deals present unique challenges and opportunities. They face heightened regulatory scrutiny, and are harder to negotiate and get to closing, but they provide opportunities for global growth that is mostly paid for using stock, not cash. At times, a single mega deal has the potential to consolidate and transform an entire industry, as we are currently seeing in the payments and biotech and pharmaceuticals spaces.
Raytheon, Allergan, Anadarko: Big, Even For Mega
The largest mega deals announced in the second quarter of 2019 were the Raytheon-United Technologies deal valued at $90.2 billion, the Allergan-AbbVie deal valued at $83.79 billion, and the Anadarko-Occidental deal valued at $55.15 billion.
In these three deals we see the imprint of key mega deal trends: horizontal mergers between big players aimed at creating industry giants; consumer non-cyclical, energy, and industrial sectors being on top; shareholders increasingly questioning the logic of huge deals; and of course the trend of larger deals.
In the largest of the deals announced in the second quarter—also the largest merger in the history of the U.S. defense industry—United Technologies Corp seeks to acquire Raytheon Co. These two companies are already the third- and sixth-ranking U.S. defense contractors for aerospace and defense. The new acting Secretary of Defense, Mark Esper, is a former Raytheon VP. Investors of the two companies haven’t been enthusiastic. President Donald J. Trump has raised questions about how this merger will impact competition. Because the merger comes in a consolidating defense industry, reading the market will be difficult for antitrust regulators scrutinizing the deal and for shareholders assessing its value.
Two pharma deals are the second- and third-largest US-target deals announced in the first half of 2019. In the second quarter, AbbVie Inc., producer of top-selling arthritis drug Humira, agreed to acquire Allergan PLC, a leader in anti-wrinkle treatments. The Celgene-Bristol Myers Squibb deal, announced in the first quarter and valued at $88.85 billion, is the largest pharma deal of the year thus far.
In the third-largest deal of the quarter, Occidental beat out Chevron a month after Anadarko had accepted Chevron’s bid. Anadarko is due to pay Chevron a one billion dollar termination fee for dropping Chevron and deciding to take Occidental’s offer. The Anadarko-Occidental deal is due to close in the second half of 2019, so long as shareholder concerns do not interfere and required divestitures and restructuring conclude ahead of closing.
How Many Deals Fail?
M&A deal failure rates for US targets indicate unsurprisingly that mega deals have the highest rate of failing to close. Rates of deal failure, meaning the percentage of deals terminated after the parties have entered into a definitive agreement, range from 16.5% to 2.1%, depending on deal size.
By target industry sector, deals in the financial sector have the lowest failure rate. The industry sectors with the highest deal failure rates are highly regulated industries, such as utilities, basic materials, and communications.
How Long Does it Take to Close a Deal?
Across industries, the vast majority of deals close between 0 to 400 days following announcement, according to Bloomberg Law data. Utilities deals are slowest, with an average of 118 days and a median of 73 days from announcement to deal completion. Like the high fail rate for this sector, the long interval between signing and closing may be linked to the intense regulatory approval process for this type of deal. The sectors that close deals the fastest are the financial and consumer cyclical sectors.
By market segment, mega deals take the longest to close with an average completion time of 179 days, second to large deals with an average completion time of 110 days. Middle market deals are the fastest to close with an average completion time of 57 days.
— With assistance from Senior Data Analytics Manager Tom Shen and Analyst Eleanor Tyler.