Hungry U.S. Companies Turn to European Targets as Home Deals Lag

(Bloomberg) -- Uncertainty about President Donald Trump's domestic policies and weak European currencies buoyed outbound dealmaking by U.S. companies during the first quarter of the year.

U.S. acquirers spent more than $70 billion on European targets in the three months to March 31, more than double the amount they dropped in the same period a year earlier and the most since 2007, according to data compiled by Bloomberg. Overall, $179.5 billion of deals involving companies in Europe were announced, the data show, a rise of 28 percent on 2016.

While the value of acquisitions of U.S. targets still outstripped that at $245 billion, those deals fell five percent from the previous year, dragged lower by a paucity of the sort of high-value takeovers that have underpinned a record run of dealmaking since 2014.

“Companies are playing it pretty safe, trimming around the edges rather than going for the large, complex mergers,” said Michael Carr, global co-head of mergers and acquisitions at Goldman Sachs Group Inc. “But the desire is there and management teams are poised to initiate significant transactions -- it's just contingent on clarity from Washington.”

The largest deal announced during the quarter was Johnson & Johnson's $29.9 billion acquisition of Swiss drugmaker Actelion Ltd. It was the only transaction inked worth more than $20 billion, compared to three such deals during the same period of 2016.

European targets are also looking more attractive as currency fluctuations help U.S. buyers get more for their money. The pound has declined by about 16 percent against the dollar since June 23 as the U.K. commits to Brexit negotiations, while the euro has been hovering around parity with the dollar since the turn of the year.

Messages from the new U.S. administration have been mixed. While Trump said during his campaign that AT&T Inc.'s proposed takeover of Time Warner Inc. should be blocked, his nomination to lead the Justice Department's antitrust division has said he sees few hurdles to the deal.

Smaller Deals

Of the five biggest deals announced just one, Reckitt Benckiser Group Plc's $17.9 billion merger with Mead Johnson Nutrition Co., involved a U.S. target. More notably still, the largest deal involving both a U.S. buyer and seller was Mars Inc.'s $9.1 billion purchase of veterinary services company VCA Inc.

Peter Tague, co-head of global M&A at Citigroup Inc., said the strength of outbound dealmaking from the U.S. suggests one thing companies are not overly concerned by are Trump's more protectionist policy suggestions, which include taxing goods entering the country.

“What is going to be interesting is the disparity between rhetoric and what actually gets enacted,” Tague said. “Until policy is much more tangible in terms of scope and timing, lots of companies will spend time listening to Washington but few are going to hold their strategy hostage to it.”

Half the respondents to a recent Brunswick Group survey see the Trump administration as a positive for merger activity because of the potential for corporate tax reform, less stringent antitrust oversight and repatriation of offshore cash. Whether they'll get their wishes is yet to be seen.

China Clampdown

The strength of European M&A helped offset the slowdown in the U.S. and a sharp decline in dealmaking by companies in Asia, which slumped 37 percent overall. That's largely due to a drop in overseas dealmaking by Chinese companies, where the government has clamped down on foreign investments in an effort to tighten capital flows.

That's put an end to the kind of megadeals seen at the beginning of 2016, when China National Chemical Corp. agreed to pay $43 billion to buy agricultural chemical producer Syngenta AG.

One factor expected to drag on U.S. deals for the remainder of the year is the challenge corporate acquirers may face in presenting transactions that fit the Trump administration's ‘Make America Great Again' agenda.

“Buyers coming into the U.S. are learning the importance of having a growth story here if they are going to receive a favorable reception,” said Chris Ventresca, global co-head of M&A at JPMorgan Chase & Co.

“If the logic for a deal is to increase domestic investments and add growth, that's quite positive,” Ventresca said. “But if it's focused on cutting costs or job elimination in the U.S., then there is likely to be real concern.”

To contact the reporter on this story: Ed Hammond in New York at ehammond12@bloomberg.net.

To contact the editors responsible for this story: Elizabeth Fournier at efournier5@bloomberg.net, Devin Banerjee