Inbound M&A Adds Fuel to a Hot Deal Market

Low-growth home economies mean that companies need a U.S. presence. The result: record volumes from foreign buyers.


Inbound U.S. mergers and acquisitions activity — foreign companies buying U.S. companies — has risen to a record high, as sluggish foreign economies push their companies to seek growth overseas and central bank easing makes it inexpensive for foreign companies to borrow money for deals.

“There’s a need to grow revenue in a low-economic-growth environment,” says Stephen Arcano, New York head of M&A at New York-based law firm Skadden, Arps, Slate, Meagher & Flom. “Growth is restrained in the U.S., but relative to other regions, it’s attractive.” He cited Europe in particular. U.S. gross domestic product grew 2.1 percent annualized in the third quarter, compared with just 1.2 percent for the euro zone. “For companies that aren’t able to grow earnings organically as much as desired, M&A is a way to grow the top line,” Arcano says.

Meanwhile, central banks have pushed interest rates to record lows in many countries, allowing companies easy access to cash for acquisitions. “Debt financing continues to be generally available at historically attractive rates,” Arcano says.

U.S. inbound M&A activity has totaled $392 billion this year through December 10, smashing the 2000 full-year record of $297.4 billion, and up 68 percent from the same period a year ago, according to Dealogic. Overall, U.S. M&A activity has registered $2.3 trillion so far in 2015, also a full-year record, up 53 percent from the year-ago period.

Chinese companies in particular have become more active in buying American assets. In terms of sectors, U.S. health care companies have drawn considerable interest from foreign buyers.

Inversion deals don’t play much of a role in inbound M&A activity. Most inversion deals consist of a U.S. company buying overseas, then relocating to take advantage of the foreign country’s lower corporate tax rates.

Obviously, the dollar’s strength hasn’t kept foreign companies from launching U.S. buying sprees. The U.S. Dollar index, which measures the greenback against six other major currencies, has risen 8.1 percent so far this year through December 11, making it more expensive for foreign companies to acquire the dollars they need to buy U.S. companies. But foreign companies don’t feel they can wait for a more favorable currency environment, analysts say. And, of course, if they buy a U.S. company and the dollar’s strength continues, that company will be worth more in their home currency.

“Some may view it as paying up to buy dollar-denominated assets in a premium-growth market,” Arcano says. “Long-term decisions aren’t made based on short-term currency levels. Foreign acquirers aren’t generally trying to time currency rates.”

As for China, the surging interest by its companies in buying U.S. assets resembles corporate Japan’s buying spree in the U.S. during the late 1980s, analysts say. “Now, if you’re a U.S. company thinking of selling, you should definitely be thinking about whether a Chinese company is buying,” says Pran Jha, a partner at Sidley Austin in Chicago who deals with M&A. “That’s a pretty fundamental change in the last three to five years.”

Inbound M&A transactions from China have totaled $27.6 billion so far this year, up 90 percent from the year-ago period, according to Dealogic. The biggest purchase announced in 2015 was Beijing information technology firm Tsinghua Unisplendour Corp.’s $3.8 billion purchase of 15 percent of Irvine, California–based data storage company Western Digital Corp. Last year Hilton Worldwide Holdings, based in McLean, Virginia, sold the storied Waldorf Astoria hotel in New York City to Beijing-based Anbang Insurance Group for $1.95 billion.

Not only is capital cheap for Chinese companies, but the government has encouraged them to acquire assets abroad. China’s economic slowdown hasn’t put a dent in the quest for U.S. companies, and may even have accelerated the trend, as Chinese companies search the world for growth, analysts say.

Whereas Western buyers of U.S. companies are often worried about short-term cash flow, the Chinese often take a longer view, Jha says. “This long-term focus often allows Chinese buyers to pay higher premiums for assets they see as attractive.”

Another country on the rise for inbound M&A is India. Its announced deal volume has registered $2.6 billion so far this year through December 10, up 166 percent from a year earlier, according to Dealogic. The country’s growing economy and increasingly outward focus have sparked the growth, analysts say. India’s strength in pharmaceuticals has led its companies to make acquisitions in that sector. For example, India’s third-largest drugmaker, Lupin, agreed in July to buy generic manufacturer Gavis Pharmaceuticals of Somerset, New Jersey, for $880 million, the biggest Indian purchase in the U.S. this year. More dealmaking activity may come in information technology and manufacturing, other sectors in which Indian companies are growing, Jha says.

As for health care, it has seen $127.3 billion of announced inbound M&A this year, including Israel-based Teva Pharmaceutical Industries’ $41 billion deal for Allergan’s generics business, according to Dealogic. The aging U.S. population is providing a boost for the industry. And much of the sector’s innovation occurs in the U.S., analysts note.

Inbound M&A will likely continue to rise, with the same supportive factors remaining in place. Central banks around the world are still accommodative, with even the Fed expected to raise rates only about 75 basis points in the next year. So interest rates should remain low. “I would think inbound M&A would grow slightly faster than domestic M&A to get back to the normal, pre–financial crisis portion of the overall M&A market, though I don’t expect a dramatic acceleration in the rate of U.S. M&A,” Arcano says. Falling oil prices could also lead to attractive buying opportunities in the energy sector, analysts say.