OECD economies are in the doldrums, but the trend in global mergers and acquisitions has rarely been more buoyant. International M&A investment in 2011 reached $822 billion as at 21 October. If this pace can be sustained, international M&A will top $100 billion by the end of the year, a 32% increase over 2010 (see chart).
That would match the third highest level ever reached in 2006. Even if M&A activity were to come to a stop in Q4, 2011 levels will still be 7% higher than those reached in 2010.
M&As can be a sign of rude business health, but in the current weak international environment, higher activity reflects stressed businesses with sagging stock valuations being gobbled up by healthier firms eager to strengthen their market positions. Finance is a case in point, and in 2011, the financial sector has dominated international M&A deals, even though the pace was well down on 2010 when finance accounted for 28% of all international M&A.
The current high level of merger activity may also reflect a hunt by capital for relatively low risk-high demand investments. Little surprise therefore that for a second year running, the oil and gas sector was the second most active sector for M&As, with healthcare in third. Both sectors account for 10% of total international M&A.
Mining and the utilities and energy sectors have both shown strong growth too. International M&A deals in mining are up 67%, from $34 billion in 2010 to $57 billion in 2011; at time of writing there were over two months remaining in the year. International investment in the utilities and energy sectors more than doubled in 2011, growing from $23 billion in 2010 to $50 billion in 2011.
Emerging markets are another factor that has been driving the upward trend. Most international investment still originates in either North America or Western Europe, but the emerging markets have become important players.
China (including Hong Kong, China) in particular became the fourth largest source of international M&A in 2011, with 7% of the world total. In 2010 it ranked second with 10%.
Less than 3% of international M&A originated in China as recently as 2007, underlying just how fast China has shot up. China accounts for a third of international M&A from emerging economies, which accounted for 20% of the global total in 2011.
The US and the UK are still the top destinations for international M&A, followed by China, Italy, and France, each with 6% of the world total. Brazil received $44 billion in international M&A, making it the 6th most popular target, while India received $21 billion (12th place) and Russia $18 billion (16th place). As a group, the emerging and developing economies received $182 billion in M&A investment, 22% of the global total in 2011.
Amid all this M&A activity, policymakers may well wonder if M&As do any good. Some major companies today expanded in part through M&As, such as EasyJet in Europe. Such mergers work by bringing new capital and management to firms, and helping them expand. But critics say mergers can destroy value and undermine competition by diminishing market choice, which is why regulators must watch them carefully. M&As are sometimes followed by downsizing, which can make for a tense social climate. While many mergers last, others flop, and sometimes famously, as witness the Time Warner tie up with AOL in 2000 which ended in December 2009.
©OECD Observer No 286 Q3 2011
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