The value of announced mergers and acquisitions (M&A) worldwide fell 27 percent year-on-year to $753 billion in the third quarter of 2016, as apprehension among corporate executives about overpaying prevented a repeat of last year's deal-making frenzy.
The preliminary Thomson Reuters M&A data shows the euphoria that drove merger mania in 2015 has subsided. While M&A activity remains robust, dealmakers said companies are being more selective in their decisions to do deals.
"With price-to-earnings multiples at historic highs, deals are more likely to happen when there is lower growth in a sector, high potential for synergies, and potential acquirers enjoy a healthy stock price," said Paul Parker, chairman of global M&A at Goldman Sachs Group Inc GS.N.
The stock market is hovering at record highs, while the S&P 500 Index's price-to-earnings ratio is at its highest level since the 2008 financial crisis. Combined with uncertainty over the U.S. Federal Reserve's policy on interest rates, companies have become more cautious when it comes to M&A.
"It does get down to high prices. I think most of last year and the two years prior, even if it was priced high it was OK... Now, it had better be for a good growth profile," said Marc-Anthony Hourihan, co-head of M&A for the Americas at UBS Group AG UBSG.S.
This year's largest deal so far was clinched in the third quarter; German drug and crop chemical maker Bayer AG's BAYGn.DE $66 billion takeover of U.S. seeds company Monsanto Co MON.N is also the biggest all-cash deal on record.
Some of the other big deals this quarter included Enbridge Inc's ENB.TO $28 billion acquisition of Spectra Energy Corp SE.N to create the largest North American energy infrastructure company, and Softbank Group Corp's 9984.T $32 billion acquisition of British semiconductor maker ARM Holdings Plc.
"The strategic consolidation activity occurring has resulted in many CEOs and boards across sectors saying 'I don’t want to be left out, I don’t want to be the last mover, because then there will be nothing left to do and I may be disadvantaged'," said Patrick Ramsey, co-head of global M&A, Bank of America Corp BAC.N.
"This will continue to be a driver of both transformative mergers and sizeable bolt-on acquisition activity," Ramsey added.
Another factor that has weighed on M&A this year, dealmakers said, is the United States and several other countries flexing their antitrust muscles and seeking to crack down on deals that aid tax avoidance or risk harming national security.
An exception to the heightened price awareness is the pharmaceutical sector. Drug companies continue to be willing to pay high premiums to buy new products, rather than devote their resources to risky drug development.
In August, Pfizer Inc PFE.N announced a $14 billion deal to acquire cancer drug maker Medivation Inc MDVN.O, at an 118 percent premium to Medivation's undisturbed share price.
"Valuations in pharmaceutical companies may not be objectively attractive. You're just dealing with simple reality that many companies need to fill the pipeline of products to supplement what they are able to produce organically," said Daniel Wolf, an M&A partner at law firm Kirkland & Ellis.
This quarter, the U.S. had its largest amount of inbound global deals in more than a decade, led by buyers in Europe, Canada and Asia, as the nation's economy continued to be attractive despite its challenges.
In July, for example, French yogurt company Danone SA DANO.PA said it would double the size of its U.S. business by buying organic foods producer WhiteWave Foods Co WWAV.N for $10.4 billion in its largest acquisition since 2007.
"Once-cautious executives are now looking for growth outside their home market, partly because there is a certain degree of frustration with the lack of economic growth in the region. That makes it even more pressing to look for growth elsewhere and the U.S. remains a logical destination,” said Dietrich Becker, a partner at investment bank Perella Weinberg Partners LP.
That said, Softbank's deal for ARM shows that some companies have seen the turmoil created by Britain's vote to leave the European Union as a buying opportunity.
Outbound M&A from China continues to be a key driver of deals. China has accumulated $159 billion in outbound M&A so far this year, topping 2015's full-year record of $107 billion.
(Reporting by Lauren Hirsch and Greg Roumeliotis in New York; Additional reporting by Sophie Sassard in London; Editing by Bill Rigby)