M&A Performance in Freefall, but Overall Volume on Track

In the second quarter of 2018, the global mergers and acquisitions (M&A) market recorded its worst performance since the launch of the Quarterly Deal Performance Monitor by Willis Towers Watson in 2008. As the overall M&A volume remains on track to beat the post-crisis high of 2015, dealmakers struggled to add value and, on average, under-performed the Index by 6.1 percentage points (pp) in the last 3 months, according to Willis Towers Watson.

Willis Towers Watson said that UK acquirers managed to buck this negative worldwide trend, recording a strong performance of 10.6pp above the index for the last 6 months. According to the results, which are based on share-price performance, 63 percent of UK dealmakers spent the first half of 2018 buying overseas companies. In contrast, North American acquirers significantly under-performed the index by 4.8pp in the last 6 months, with overseas deals representing just 13 percent of acquisitions made so far this year, compared to 20 percent for the same period in 2017.

Jana Mercereau, head of corporate mergers and acquisitions for Great Britain at Willis Towers Watson, said, "The increasing focus on domestic markets will intensify the competition for an ever-shrinking pool of targets, making it harder to deliver a deal without harming shareholder value. British companies have instead benefited from taking a more internationalist stance by targeting foreign businesses, despite Brexit uncertainties still looming large and the weakness of the pound."

Alongside North American dealmakers, all other regions underperformed their respective indices in the second quarter of 2018. While European acquirers took the top spot in terms of the performance league with a marginal underperformance of 0.6pp, Asia-Pacific businesses continued to record the worst regional M&A results, with a major under-performance of 21.7pp. Reflecting the trend in North America, more Asian buyers are turning to their home markets, with domestic deals now accounting for 82 percent of all acquisitions made in the first half of 2018, compared to 76 percent in the same period last year.

Additional findings revealed by the Willis Towers Watson global study in partnership with Cass Business School include the following.

• Deal types of all sizes, valued from $100 million to over $10 billion, have underperformed the Global Index on average.
• Over a 1-year rolling period, acquirers have under-performed overall by an average of 2.7pp.
• Quick, cross-sector, and cross-border deals all under-performed the index (by 3.2pp, 5.4pp, and 6.6pp, respectively), a clear trend reversal from the previous quarter.
• Consumer Staples, Healthcare, and Telecommunications sectors outperformed their respective indices.
• The Consumer Product and Services, Energy and Power, Financial, Industrial, Material, and High Technology sectors under-performed their indices.

Ms. Mercereau said, "The deal making bonanza seen so far in 2018 is likely to continue as long as solid economics, low interest rates, and supportive credit markets persist. At the same time, it's also hard to ignore that the last two occasions when M&A activity reached similar levels were a year before the financial crash in 2007 and just before the bursting of the dot.com bubble in 2000.

"Despite the optimism and appetite for pursuing growth through M&A, the poor performances that have followed completed deals suggest investors right now have very little margin of error. As M&A activity accelerates towards its peak, the importance of discipline and strong diligence grows so companies can mitigate risks and avoid the mistake of paying over the odds."