Growth will remain top of mind for executives in 2017 as turbo-charged changes in the business world outweigh concerns around ongoing geopolitical uncertainty. Mergers and acquisitions (M&A) are now a cornerstone of today’s corporate strategy — alongside joint ventures, alliances and partnerships — as the quickest route to growth. Despite heightened uncertainty throughout the year, 2016 was one of the best years ever for dealmaking. While the deal value globally – US$3.5t – was down 17% against 2015, which was a record year; overall, 2016 was up 9% against 2014 and 44% over 2013. The resurgence of M&A should continue through 2017, bringing executives to the deal table.
Five key trends that are expected to define the transaction market globally in 2017:
1. Future-proofing: today’s deals can be tomorrow’s game-changers
The pace of future-proofing business models will accelerate as companies continue to adapt to digital transformation, the blurring of traditional industry lines and changing consumer preferences. Of all the deals last year, 9,616 were cross-sector transactions worth a combined US$937b – up 11% compared with 2015 – signaling that executives are already acquiring the innovation that will fuel the re-invention of their own business models and their sector more broadly.
Steve Krouskos, EY Global Vice Chair – Transaction Advisory Services (TAS), says:
“Executives need to future-proof their business given the hyper speed of technological advances in a highly disruptive landscape. Organic investment might not be enough and M&A can be a faster route to innovation and growth. Future-proofing the business will be a key – if not the main – driver of M&A activity in 2017.”
2. Cross-border deals will be in ready supply in 2017
In 2016, Chinese buyers dominated the world headlines, with the value of those deals alone totaling US$210b, up 127% against 2015. Overall, last year saw 8,731 cross-border deals worth a combined US$1.3t (37% of all value). In 2017, other countries will likely join the race to buy into pockets of growth and secure supply chains in an era of increasing geopolitical uncertainty.
Krouskos says: “Companies are operating in a globalized environment with globalized supply chains. Those supply chains need to be secured and M&A is increasingly becoming an effective instrument to achieve that. In 2017, we will see increasing cross-border dealmaking, particularly between Asia and North America, as well as a continuing strong flow of outbound acquisitions from China.”
3. Currency converts into attractive timing of deals
The timing of deals can be affected by currency movements and the downward pressure on the British pound and the euro could make assets in Europe more attractive.
Krouskos says: “Strategic growth plans drive deals rather than currency. People don’t buy houses they don’t like just because the price has dropped 10% – it’s the same principle with M&A. However, European companies with foreign currency denominated cash flows – especially in US dollars – will be in a strong position domestically, enabling them to do more deals. Divergent economic performance across geographies in 2017, will pose both challenges and opportunities for dealmakers and offer additional impetus for cross-border M&A.”
4. Regulation: yea or nay?
Last year saw a record amount of deals being pulled due to regulatory and antitrust concerns. In 2017, the regulatory aspect of dealmaking will be in the spotlight, particularly in the US where the presidential election result could see a relaxation of controls.
There is a growing trend toward creating national economic champions in some countries to contest in the increasingly competitive business world. Regulators in developed markets, especially the US and Europe, may look to address this trend in a global marketplace.
Krouskos says: “The questions dealmakers will be asking themselves in 2017 will be whether the competition authorities will have as much of an impact this year as in 2016. Will we see regulators globally acknowledge specially established national champions? Will the regulators block acquisitions by these national economic champions or start creating their own?”
5. Acceleration of portfolio recycling will be in vogue in 2017
Deal pipelines remain healthy despite the geopolitical uncertainty and rapid change, pointing to equally strong – if not stronger – M&A activity in 2017.
Krouskos says: “Ensuring portfolios are as fit and healthy as possible will continue to be a priority. Companies cannot afford to hold on to any assets that are not adding to bottom and top line growth. This should result in resurgence of private equity in 2017, particularly in the mid-market, as companies jettison underperforming assets – prime targets for private equity portfolios.”
Executives will continue to search across a wider number of targets and use a variety of deal structures. In 2017, companies will likely accelerate acquisitions outside their core sector in response to increasing competition and to gain new customers and extend product offerings.
Krouskos says: “The world of M&A is constantly changing, requiring completely different boardroom thinking on a broader range of topics – from geopolitics and regulation, digital disruption and data proliferation, to new deal structures and cross-sector integration. This complexity will breed a further clarity of M&A strategies in 2017 as companies continue to look to smart, strategic deals to deliver on their growth strategy.
EY Legal Services Contacts:
Richard Norbruis – Global Transaction Law Leader