Offshore M&A activity grows despite seasonal decline

The offshore merger and acquisitions market was one of the few world markets to have experienced growth in the cumulative value of transactions in the third quarter of 2012 compared to the same period last year, according to a report released by Appleby. 

The latest edition of Offshore-i, the law and fiduciary firm’s quarterly report which provides data and insight on merger and acquisition activity in major offshore financial centres, noted just like in the first two quarters of 2012 offshore markets were faring better than other regions in terms of the cumulative value of transactions. 

Compared to the third quarter last year volumes are down 16 per cent, while transaction values are 11 per cent higher. 

“While we remain quietly confident of the early signs of activity returning to our markets, it is still impossible to overlook the macroeconomic situation and the continuing gloom on our doorstep,” said Peter Bubenzer, Appleby’s Group chairman. “The uncertainty in the eurozone, which we hoped might reach some kind of resolution back in Q1, remains far from entering an end game, while the close race for the White House will, we suspect, have a profound effect on US transactions through to year end.” 

Appleby’s report predicts that the year will close lower than 2011 in part because of the general condition of the economy and the reductions in expected global GDP forecast by the International Monetary Fund. Additionally, the report points to the so-called “fiscal cliff”, the potential expiration of certain US tax provisions and implementation of stringent spending cuts. Appleby expects this to further depress current investment activity. 

Cayman remains the most attractive offshore target destination for investors, for the third quarter running, followed by Hong Kong, which witnessed a significant increase in the value of deals involving its companies as targets, according to the report. 

The majority of deals in the offshore region involved the financial services sector continuing to dominate activity in the offshore region, accounting for more than a third of all transaction. The second highest value sector was telecommunications, followed by manufacturing of computer, electronic and optical products. 

The largest deal this quarter was the US$3.6 billion stake taken in Bermuda-incorporated Vimpelcom, the Dutch telecoms provider, by Russia’s Altimo. This was followed by Taiwan’s biggest chipmaker, MediaTek’s US$2.1 billion stake in Cayman-incorporated monitor maker MStar Semiconductor. 

Compared to the second quarter of 2012, the third quarter saw a drop in M&A activity levels in the offshore region, falling from 475 to 428, with the cumulative value of transactions also declining from US$40.4 billion to US$33.5 billion. The report notes, however, a certain cyclicality in that third quarter deal activity is often quiet as transactions dry up in the summer months.  

Of the 428 deals completed this quarter, minority stakes accounted for 56 per cent of the volume and 52 per cent of the value spent over the period. 

“We remain convinced that this high volume of minority stake transactions is a function of the economic uncertainty with which investors are currently forced to grapple, which is deterring dealmakers from riskier whole-business transactions,” Mr. Bubenzer said. “Minority stake deals allow acquirers some exposure to new markets or businesses, while making it possible to limit that exposure to a comfortable level. At the same time, while gaining bank lending is challenging, such deals give sellers access to much-needed capital, and as a result we expect the trend towards this deal type to continue well into the next year.” 

Meanwhile, acquisitions of offshore targets accounted for 150 deals against 167 in Q2 2012, and US$11.8 billion of value compared to US$15 billion last quarter. 

Initial public offerings in turn experienced a substantial drop-off between the third and the second quarter, as the number declined from 35 to 17 IPO. 

“The return of greater activity in the IPO market is likely going to be linked with more continuing positive trends in stock markets, reflecting better valuations for companies,” Mr. Bubenzer said, adding that “the volatility over the last several months mean that it is likely that companies will now want to wait for a more continuing improving trend before going to market.” 

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