January 15, 2018

What to expect for M&A in 2018

Felicia Asiedu, Merrill Corporation | January 15, 2018

M&A activity at the start of 2017 was lacklustre and, although momentum picked up towards the end of the year, global M&A volumes were at their lowest since 2013. Despite this, rumours and announcements of high-profile acquisitions, rising deal values and an increase in strategic acquisitions made 2017 a banner year for M&A activity and gave investors, consumers and journalists plenty to talk about.

For much of last year, US companies shied away from large-scale M&A deals, instead opting to wait and see how regulatory enforcement would unfold under the Trump administration and whether promises to overhaul the tax code would be delivered upon. By contrast, growing confidence resulted in Europe accounting for 27% of total deal-making, a six-year high. The UK alone saw a 6% growth in deal volume and 76% in value.

In the US, it seems the waiting is over and speculation of blockbuster deals on the horizon have already kickstarted the year. One of the trends in 2017 that we expect to continue to see in 2018 is the blurring of lines between industry sectors and companies willing to move outside what has traditionally been the sector that they’ve been known to play in. Within the first few days of 2018, there were headlines that Amazon.com AMZN could buy Target TGT and Apple AAPL could acquire Netflix NFLX. Although these deals may not take place, the speculation alone is an indicator that it has become necessary for companies to look beyond traditional M&A targets in order to survive.

Looking ahead, a positive economic outlook, low borrowing costs and an abundance of “dry powder” waiting for deployment by private equity firms are all factors that should support continued deal-making in 2018, according to a survey by EY of senior executives from across the globe. The firm’s poll showed 56 percent of respondents expect their company will actively pursue deals during the next 12 months. That is in line with prior results from the previous two years.

Corporate executives anticipate further competition in 2018 from private equity buyers for quality assets. “Private equity is likely to be one of the biggest stories in M&A over the next 12 months, with corporates being challenged for assets more than during the past five years,” EY said. The firm’s survey found 60 percent of those polled expect more competition for assets, while half see private equity as the top challenger.

Similar to EY’s gauges on the outlook, rival consulting firm Deloitte also offered some prognostications based on its recent survey of both corporate executives and private-equity leaders. The two groups anticipate increases in the coming year for the number of M&A transactions and the aggregate value of deals.

The subject of divestitures also offered some common ground, with each of the surveys suggesting they will serve as another avenue of support for deals. Deloitte found 70 percent of those polled plan to shed business in 2018, citing shifts in strategy as the biggest reason. By contrast, 40 percent had similar plans for divestures in the spring of 2016.

Regulatory scrutiny may put a damper on the number of big mergers undertaken, but “a by-product of the megadeals completed during the current cycle will be divestures of high-quality assets,” EY wrote. “This may be due to antitrust or competition concerns, or as companies divest non-core assets acquired as part of a larger deal.”

Other takeaways on the outlook from the polls: acquiring technology is the number one driver of M&A, and with corporations’ cash on hand increasing, executives’ preferred use for their capital is deal making, Deloitte said “companies are sending strong signals that they intend to aim for bigger M&A targets in 2018; sizable majorities of corporate respondents and private equity investors anticipate brisker activity over the next 12 months,” Deloitte wrote. “If the legislative environment yields substantive changes, that could also lead to additional deal activity.”

Ready to Get Started?

You may also like:

Keep the deal moving - even on the move

With the Datasite mobile app, you always know where the deal’s at – wherever you are.

M&A Professional reviewing documents via data room
The ABCs of SPACs and de-SPAC’ed Entities

With the change in market conditions over the last year (increased inflation, interest rates etc.), there is concern that companies who went public via a SPAC in 2020 and 2021 will not be able to continue their business operations due to a lack of free cash flow or will face de-listing because their stock is not in compliance with the NYSE or NASDAQ requirements. These companies may need to explore alternative options, such as rescue capital raises, full company sale to a strategic, bankruptcy, and PE take-private options, etc.

M&A Professionals work on a data room
M&A and digital transformation: Opportunities and challenges in APAC

The pandemic saw a growth spurt in digital platforms. Will the tech sector be able to sustain investor interest in the face of challenging macroeconomic dynamics? Learn more about emerging digital transformation stories from APAC in our expert spotlight blog.

City Skyline