What's Market: 2015 Year-End Public M&A Wrap-Up

Practical Law Article w-001-3603 (Approx. 16 pages)

What's Market: 2015 Year-End Public M&A Wrap-Up

by Practical Law Corporate & Securities

Increased Public Deal Volume

According to data provided by Thomson Reuters, 2015 saw a total of 9,962 US-targeted announced deals, generating $2.344 trillion in deal value. This represented a 64.3% increase from 2014, which saw $1.427 trillion in US-targeted deals. By deal volume, however, the total number of US-targeted announced deals actually fell, from 10,129 in 2014 to 9,962 in 2015.

Though M&A activity among all US-based announced transactions simultaneously rose and fell depending on the measurement, the rise in deal value for negotiated US public M&A was matched by a significant rise in deal volume. As tracked by What's Market, 190 agreements for the acquisition of US reporting companies valued at $100 million or more were signed in 2015. This represents the largest total ever for one year to have been recorded in the What's Market Public Merger Agreements database, an increase of 25.8% over 2014 (151 deals), 35.7% over 2013 (140 deals), 31.9% over 2012 (144 deals), 20.3% over 2011 (158 deals), and 5% over 2010 (181 deals) (see Figure A).

Image 1 within What's Market: 2015 Year-End Public M&A Wrap-Up

The fourth quarter of 2015 was the most active of the year, with 55 deals, making it the single busiest quarter for domestic public M&A in the Public Merger Agreements database. The third and fourth quarters were nearly equally robust for large cap acquisitions, with 14 and 13 deals, respectively, reached to acquire US public targets valued at $5 billion or more.

Sustained Dominance of Strategic Buyers

Strategic buyers continued to dominate the public M&A landscape in 2015, much as they did in 2014. 165 of the 190 US public M&A deals (86.8%) valued at $100 million or more involved strategic buyers. This is roughly even with the rate observed in 2014, where 132 of the 151 US public M&A deals (87.4%) valued at $100 million or more involved strategic buyers.

The dominance of strategic buyers was most pronounced among large cap acquisitions. In 2015, 47 deals for the acquisition of US reporting companies valued at $5 billion or more were signed, and 43 of those deals were with strategic buyers.

By contrast, financial buyers in 2015 accounted for only 27 of the 190 US public M&A deals (14.2%) valued at $100 million or more (including the strategic-financial collaborations among Dell Inc., Michael Dell, and Silver Lake to acquire EMC Corporation, and between Mueller Industries and Atlas Holdings to acquire Tecumseh Products Company). This was a small uptick from the low participation rate of financial buyers in 2014 (12.6% of overall US public M&A deal volume), but still low relative to the traditional 3-1 split observed in previous years (see Figure B).

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Of the 27 financial deals in 2015, 17 were reached with single private equity firms who single-handedly acquired their target companies. The remaining deals included:

Club deals, such as the take-privates of Integrated Silicon Solution, Inc., Informatica Corporation, OmniVision Technologies, Inc., EMC Corporation, SolarWinds, Inc., and Tecumseh Products Company.
The management buyout collaborations between outside private equity firms and management to acquire Life Time Fitness, Inc. and Blount International, Inc.
Deals with financial holding companies, including Berkshire Hathaway Inc.'s acquisition of Precision Castparts Corp. and JAB Holding Company's acquisition of Keurig Green Mountain, Inc.

Continued Prevalence of Stock Deals

Strategic buyers continued to take advantage of relatively stable stock market conditions in 2015 by using their own stock as currency for M&A deals. Ninety-two of the 190 US public M&A deals (48.4%) valued at $100 million or more signed in 2015 used stock as a component of consideration, including all-stock/equity exchanges, mixed-consideration deals, and cash/stock election transactions. This percentage is virtually the same as the 48.3% of deals signed in 2014 that used stock as a component of consideration, and remains much higher than the ratio observed in previous years: 28.6% of deals in 2013, 25% of deals in 2012, 29.1% of deals in 2011, and 29.3% of deals in 2010 (see Figure C).

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Whether the stock market volatility observed toward the end of 2015 will have any impact on public M&A volume or deal structure is an early issue to be aware of in 2016.

Surge in Large-Cap Acquisitions

Building on the momentum established in 2014, large-cap acquisitions reached record levels in 2015, boosted by the predominance of strategic buyers and their highly valued stock. There were 47 US public M&A deals valued at $5 billion or more signed in 2015, representing a 38.2% increase over the 34 large-cap deals signed in 2014, which previously had been the high-water mark for these deals over the last five years (see Figure D). On a percentage basis, large-cap deals made up 24.7% of overall deal activity in 2015, a slight increase from the 22.5% seen in 2014 and a significant increase from the 10% and 4.9% seen in 2013 and 2012, respectively.

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Over half of the 47 deals valued at $5 billion or more came from just four industry sectors:

Eight deals from the pharmaceuticals and biotechnology industry.
Seven deals from the software and electronics industry.
Six deals from the oil and gas industry.
Five deals from the insurance industry.

The top ten US-targeted announced deals of 2015, as measured by Thomson Reuters, are recorded in Figure E. What's Market deal summaries are available for the largest eight of the ten deals, seven in the Public Merger Agreements database and one in the Spin-Offs database. Notably, none of the ten deals contemplate all-cash consideration.

As for the two remaining transactions, the Teva/Allergan deal did not meet the criteria for inclusion in What's Market because the seller, Allergan plc, is no longer a US-based company following the closing of its inversion deal with Actavis plc earlier in the year. The Canadian Pacific/Norfolk Southern deal is also not summarized in What's Market because, as of press time, the parties have not entered into a merger agreement.

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Middle and Small Markets Flat

With large-cap acquisitions fueling the record year for global and US-based M&A, activity levels in the middle and small markets stayed mostly even with 2014.

Global M&A Activity

According to Thomson Reuters, worldwide announced M&A deals valued up to $500 million totaled $914.44 billion on 41,796 deals in 2015. This represented a 1.1% decrease in deal value from 2014 on a 1.6% increase in deal volume. The most active industries in the global middle market were:

Real estate (15.9% of the market).
High technology (13.4%).
Industrials (11.9%).
Financials (11.1%).

Global small-market M&A activity produced similar results, with a1.5% decrease in deal value from 2014 on a 1.7% increase in deal volume. According to Thomson Reuters, worldwide announced M&A deals valued up to $50 million totaled $141.56 billion on 37,148 deals in 2015. The most active industries in the global small market were:

High technology (16.3% of the market).
Industrials (13.5%).
Real estate (13.3%).
Financials (12.8%).

US M&A Activity

The US middle market for M&A dropped more significantly from 2014 levels than did the global market. According to Thomson Reuters, US announced M&A deals valued up to $500 million totaled $208.61 billion on 9,612 deals in 2015—a 13.9% decrease in deal value from 2014 on a 1.1% decrease in deal volume. The most active industries in the US middle market were:

Real estate (15.8% of the market).
High technology (15.3%).
Energy and power (12.8%).
Healthcare (10.3%).

The US small market stayed closer to 2014 levels than did the middle market, but still fell. According to Thomson Reuters, US announced M&A deals valued up to $50 million totaled $25.16 billion on 8,603 deals. This represented a 2.6% decrease in deal value from 2014 on a 0.8% increase in deal volume. The most active industries in the US small market were:

Real estate (20.5% of the market).
High technology (14.5%).
Healthcare (11.5%).
Financials (11.2%).

Strict Antitrust Regulatory Environment

US antitrust regulators were aggressive in 2015, taking aim at several major public and private M&A transactions. In three deals (Comcast/Time Warner Cable, Applied Materials/Tokyo Electron, and Thai Union Group (owner of Chicken of the Sea International)/Bumble Bee Foods), the parties terminated their merger agreements rather than litigate against the antitrust agencies.

Two other deals (Electrolux/General Electric and Sysco/US Foods) were abandoned after litigation commenced, in the latter case after the FTC won a preliminary injunction.

In this strict regulatory environment, some dealmakers have taken substantial steps to reduce potential antitrust concerns, such as preemptively agreeing to carve-out transactions. For example, Anheuser-Busch InBev announced, with the launch of its offer for SABMiller, that it would sell SABMiller's 58% stake in the MillerCoors joint venture to SABMiller's joint venture partner, Molson Coors Brewing Co., which held the remaining 42% stake. As long as corporate acquirers continue to engage in large, strategic combinations that lead to more industry consolidation, antitrust risk will remain an important consideration when negotiating public M&A deals.

Reverse Break-Up Fees

One method for allocating antitrust risk between buyers and target companies is to negotiate a reverse break-up fee that becomes payable by the buyer in the event that antitrust approval (or other regulatory approval) is not obtained. Twenty-five of the 190 public deals signed in 2015 charged the buyer a reverse break-up fee in the event a required regulatory approval was not obtained. Reflecting the increased risk of antitrust authority rejection when large market participants consolidate, 14 of the 25 deals (56%) were valued at $5 billion or more, with another six deals (24%) valued between $1 billion and $5 billion.

Of the 25 public deals containing a reverse break-up fee payable for regulatory failure, six deals (24%) came from the software and electronics industry, including the $19 billion Western Digital Corporation/SanDisk Corporation merger.

Two of the 25 deals featured reverse break-up fees priced at greater than 7% of the deal value:

Expedia, Inc./Orbitz Worldwide, Inc. (7.19% fee).
ON Semiconductor Corporation/Fairchild Semiconductor International Inc. (7.50% fee).

The largest reverse break-up fee by dollar value payable for antitrust failure came from the $78.7 billion Charter Communications, Inc./Time Warner Cable Inc. deal, in which Charter could become obligated to pay a $2 billion fee under certain circumstances.

For quarterly-updated market information on reverse break-up fees for antitrust failure, see Practice Note, What's Market: Reverse Break-Up Fees for Antitrust Failure.

Most Active Industries

In the US market of total announced M&A activity, the most active industry sector in 2015, on the basis of deal value data provided by Thomson Reuters, was the healthcare sector. Deal value in the healthcare sector totaled $558.3 billion on 1,021 deals, more than double its $237.4 billion of M&A activity in 2014, for a 23.8% market share in 2015. The high technology sector placed second, accruing $387.2 billion in deal value on 1,737 deals, for a 16.5% share. The energy and power sector, which produced the most deal value in 2014, followed in third, with $267.8 billion in deal value on 654 deals, for an 11.4% market share.

For public M&A deals tracked by What's Market, the most active industry sectors in 2015 were:

Software and electronics (40 deals, or 21.1% of overall deal activity).
Banking and financial services (24 deals, or 12.6% of overall deal activity).
Pharmaceuticals and biotechnology (15 deals, or 7.9% of overall deal activity).
Oil and gas (14 deals, or 7.4% of overall deal activity).

Of these four sectors, the software and electronics sector saw the most significant year-over-year increase in deal activity, with 40 deals signed in 2015, an 81.8% increase over the 22 deals signed in 2014. The other three industry sectors stayed close to their levels of activity observed in 2014.

Go-Shops and Strategic Buyers

Go-shop provisions allow the target company to actively solicit and negotiate competing bids from third parties and provide confidential information to those parties for a specified period of time following execution of the merger agreement. They are most often included in a merger agreement if the target company has yet to conduct a meaningful pre-signing market check and give the target company's board comfort that it has satisfied its fiduciary duties to the company's shareholders.

In 2015, 21 of 190 deals (11.1%) contained a go-shop, a slight increase from 2014 when 13 of 151 deals (8.6%) included a go-shop, but still down from 2013 with 17 of 140 deals (12.1%) and 2012 with 19 of 144 deals (13.2%).

Go-shops are typically less common in deals with strategic buyers, who are not as opposed as private equity buyers to pre-signing auctions. However, in 2015, for the first time more strategic buyers agreed to a go-shop than did financial buyers (see Figure F). Of the 21 deals in 2015 that contained a go-shop right, 11 were reached with strategic buyers and eight were reached with financial buyers. The other two deals were the strategic-financial buyer collaborations in the Dell/EMC deal and the acquisition of Tecumseh Products Company.

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Debt-Financed Deals Remained Steady

Following a rebound in leveraged public M&A activity in 2014, debt-financed deals remained an important component of the broader US public M&A market in 2015. Eighty-six public deals, or 45.3% of all deals tracked by What's Market in 2015, involved buyers who used debt to finance their acquisitions, just slightly below the 47% (71 deals) in 2014, but still an increase from the 40% (56 deals) in 2013. By comparison, debt-financed deals represented 48.6% of acquisitions in 2012 and 55.7% of acquisitions in 2011 (see Figure G).

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Debt financing provided an important impetus for the increase in large-cap acquisitions in 2015. Of the 47 deals for the acquisition of US reporting companies valued at $5 billion or more, 32 deals (68.1%) were reached with buyers who raised new debt to finance their deals. Eighteen of those 32 deals contemplated all cash consideration, with the other 14 either paying partially in stock or giving the target stockholders a choice between cash and stock.

Reverse Break-Up Fees

Of the 86 debt-financed public M&A deals in 2015, 28 (32.6%) included a reverse break-up fee payable for a financing failure, or other material breach by the buyer or failure to otherwise close the deal when required to do so. (These figures do not include reverse break-up fees payable for antitrust failure or other triggers similar to the target company's fiduciary break-up fee.) This is close to the rate observed in 2014 (33.8%) and continues a decline from 2013, when 64.9% of debt-financed deals contained this type of reverse break-up fee.

The decline from 2013 can be explained by the slowdown in M&A activity among financial buyers. Strategic buyers, who were the primary generator of M&A activity in 2014 and 2015, typically agree to pay full damages for willful breach following termination, without a cap on damages represented by a reverse break-up fee.

During 2015, 11 leveraged deals that contained this type of reverse break-up fee priced the fee at 6% or more of the total deal value.

For more information on reverse break-up fees, see Practice Note, Reverse Break-Up Fees and Specific Performance.

Shareholder Activism and Hostile Deals

Shareholder activism and hostile deal activity continued to drive the M&A market in 2015, with several notable deals resulting from activist campaigns and topping bids.

Deals Generated by Shareholder Activists

Shareholder activists again played an important role in the domestic public M&A sphere in 2015, pursuing a variety of strategies to effect corporate changes, including short-slate and control-slate proxy contests, and campaigns to encourage spin-offs, carve-out transactions, and sales of the company.

Dow Chemical Company and E. I. du Pont de Nemours and Company

One of the largest deals in 2015, the Dow Chemical and DuPont merger (valued at $68.4 billion by Thomson Reuters) was reached after sustained activist campaigns at both companies. In December 2015, the two companies agreed to combine in a merger of equals and then separate the combined company into three publicly traded companies. Dow Chemical had been facing calls from Dan Loeb's hedge fund Third Point LLC to spin off a portion of its business since early 2014, and in November 2014 it agreed to add four independent directors to its board, including two nominated by Third Point. For DuPont, the merger with Dow Chemical followed a protracted proxy fight with Nelson Peltz's activist hedge fund Trian Partners. Although none of Trian's nominees were ever elected to the DuPont board, the merger with Dow Chemical represented a win for Trian, which had previously called for a break-up of DuPont.

Yahoo! Inc. Spin-Off

In January 2015, following pressure from Starboard Value LP, Yahoo announced plans to spin off its stake in Alibaba Group Holding Ltd. in order to focus on building its core business. Although investors were initially supportive of the plan, concerns over the tax implications of the deal grew after the Internal Revenue Service denied Yahoo's request for a private letter ruling on whether the deal would be tax-free. In November 2015, Starboard urged Yahoo to drop the spin-off plan and sell its core businesses. Yahoo later announced in December 2015 that it would suspend the proposed spin-off of its Alibaba stake and instead explore a spin-off of its core businesses. On January 6, 2016, Starboard delivered a letter to the board of Yahoo urging it to change its management, business strategy, and board composition.

Dell Inc., Michael Dell, Silver Lake, and EMC Corporation

The Dell/EMC deal, the fourth largest US-based deal of the year, arose in part out of the urging of activist investor Elliott Management Corporation. Elliott first disclosed its stake in EMC in July 2014 and in October 2014 began publicly urging the company to pursue a sale. The Dell/EMC deal represents the largest deal ever in which the target company had been the focus of an activist campaign to sell itself (excluding the Actavis/Allergan deal, which derived in part from the maneuvering of Pershing Square, but not toward Pershing Square's preferred buyer, Valeant Pharmaceuticals International).

Energy Transfer Equity LP and The Williams Companies, Inc.

The fifth largest US-based deal of the year is also the second largest sale ever to have followed an activist campaign for a sale. In December 2013, Corvex Management LP and Soroban Capital Partners acquired stakes in The Williams Companies and, two months later, reached an agreement with the company to put two directors on the company's board. In May 2015, the company entered into an agreement to acquire its partnership subsidiary Williams Partners L.P. for $13.8 billion in an all stock-for-unit transaction.

However, an announcement that the company would pursue strategic alternatives followed in June 2015, and in September 2015, the company agreed to a sale to Energy Transfer Equity LP. This deal, in effect, was a topping bid spurred by shareholder activists, and the termination of the agreement with Williams Partners L.P. triggered a $428 million break-up fee that was satisfied through a waiver of a portion of the quarterly incentive distributions that The Williams Companies would ordinarily receive from Williams Partners L.P.

Ann Inc. and Ascena Retail Group, Inc.

Ann Inc., the parent company of women's retailers Ann Taylor and LOFT, had been under activist pressure to sell itself since 2014, when Engine Capital LP and Red Alder LLC (collectively owning less than 1% of Ann Inc.) urged the company to sell itself as soon as possible. In May 2015, Ann Inc. agreed to a sale to a strategic buyer, Ascena, owner of Dressbarn and Lane Bryant.

MeadWestvaco Corporation and Rock-Tenn Company

In January 2015, MeadWestvaco and Rock-Tenn agreed to a merger of equals valued at $16 billion in combined equity values. The deal came after Starboard Value disclosed its stake in MeadWestvaco in June 2014 and criticized the company's performance. In response, in January 2015, MeadWestvaco announced that it would spin off its specialty-chemicals business. Those plans did not end with the announcement of the Rock-Tenn merger two weeks later.

Topping Bids

2015 saw its fair share of "deal jumps," both successful and unsuccessful. Notable topping-bid scenarios from the second half of 2015 are described below.

Microsemi Corporation, Skyworks Solutions, Inc., and PMC-Sierra, Inc.

In November 2015, Microsemi agreed to acquire PMC-Sierra in a $2.5 billion cash-and-stock deal. This agreement was a superior offer to Skyworks' October 5, 2015 agreement (as amended and restated on October 29, 2015) to acquire PMC-Sierra for $2.27 billion in cash, and triggered payment of a $88.5 million break-up fee to Skyworks.

Bridgestone Americas, Inc., Icahn Enterprises, and The Pep Boys - Manny, Moe & Jack

In October 2015, Bridgestone agreed to buy Pep Boys for $15.00 per share in cash. On December 7, 2015, Carl Icahn and Icahn Enterprises L.P. submitted an offer to buy Pep Boys for $15.50 per share. In response, on December 11, 2015, Bridgestone and Pep Boys amended their merger agreement to match this $15.50 per share bid. At that point, Icahn Enterprises raised its offer to $16.50 per share and added that it would automatically top any Bridgestone offer by $0.10, up to $18.10 per share. Bridgestone re-raised its offer, but only to $17.00 per share, which Pep Boys still deemed superior to the Icahn Enterprises bid. Whatever complaint Carl Icahn may have had at that point, he did not pursue, instead raising his offer to a flat $18.50 per share. Bridgestone did not match that offer and Icahn Enterprises and Pep Boys entered into an agreement on December 30, 2015.

Diodes Incorporated, Montage Technology Group Limited, and Pericom Semiconductor Corporation

Diodes first reached an agreement to acquire Pericom on September 2, 2015, at a price of $17.00 per share in cash. On September 30, 2015, Montage submitted an offer of $18.50 per share to Pericom's board. In response, on November 6, 2015, Diodes and Pericom amended their merger agreement to increase the consideration to $17.75 per share, while also increasing the size of the break-up fee from $15 million to $15.7 million. Throughout the bidding war, Pericom repeatedly rejected Montage's offer, even after it was revised to $19 per share, citing financing and regulatory uncertainty. The Diodes/Pericom deal closed on November 24, 2015.

For summaries of the deals mentioned in this article, visit What's Market and search by party name.

An Expert's View: Public M&A Deals

Steven Epstein of Fried, Frank, Harris, Shriver & Jacobson LLP discusses highlights from public M&A and provides projections for 2016:

The past year saw record levels of M&A activity, both in terms of deal size and volume. Do you expect to see a healthy M&A market for the foreseeable future, or is the surge a sign that companies are acting quickly before the deal environment changes?

We expect to see a healthy M&A market for at least the first part of 2016. Obviously, last year ended on a high note as M&A volumes surpassed the previous record set in 2007. On the back of this record-setting year we continue to see a strong pipeline of deals, which bodes well for 2016. Buyers remain optimistic despite macroeconomic and geopolitical uncertainty, such as an economic slowdown in China, the Greek debt crisis, and continued instability in the Middle East. We also saw the Federal Reserve raise interest rates for the first time in a decade. Buyers have generally shrugged off these challenges in the context of pursuing acquisitions, because investors continue to demand growth in a low revenue growth environment and M&A activity presents a viable option for management teams to achieve that growth.

In the end, robust M&A activity requires just the right combination of economic and psychological factors. Some key economic factors, such as growing levels of cash on corporate balance sheets and available credit, have been in place for quite some time. However, we did not experience a material increase in M&A activity levels until we observed a rising level of confidence in the C-suite and in the boardroom. Now that this long-awaited, fragile balance has been achieved, we believe the current environment can sustain this level of deal activity, at least in the short term.

Private equity firms have mostly stayed on the sidelines throughout the surge in public M&A deals. Do you expect that trend to continue, or will private equity firms find reason to re-enter the public M&A arena?

Private equity firms have proven over time that they are creative dealmakers and that they will find ways to transact in virtually any environment. While activity levels in this segment may not be as frothy as some anticipated, particularly in light of the overall strength of the M&A market, we expect 2016 will be a reasonably busy year for sponsors.

Private equity firms continue to have plenty of dry powder to invest and a boom in mega-mergers is usually followed by a steady stream of divestitures. Private equity is the natural buyer for these assets. Nonetheless, a choppier debt-raising environment, especially for highly leveraged transactions, coupled with lofty stock market valuations, will continue to present challenges for sponsors as they compete with strategic buyers, particularly for the more sizable transactions.

Shareholder activists continued to play outsized roles in the M&A and governance spheres in 2015. Now that shareholder activism is no longer a new phenomenon, where do you see the relationship between public company boards and activists heading in 2016?

Over the past several years, many public company boards have adjusted their view of activists. The reflex to circle the wagons and fight the activist (described in an earlier time as a "corporate raider") at almost any cost to the company has given way to a more measured approach, which is usually marked by a willingness to engage in an open dialogue.

A substantial number of activist situations end in a settlement at a fairly early stage, often resulting in board representation for the activist. In turn, activists have become longer-term players. According to some surveys, average hold periods have increased substantially to nearly three years. We believe that this evolution in the relationship between activists and companies will continue. Management teams and, in some cases, lead directors will spend more time than ever before on shareholder engagement activities in 2016, while activists will need to continue to demonstrate to the broader shareholder base that their perspectives and ideas are aimed at more than just short-term gain.

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