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The global mergers and acquisitions (M&A) market remained strong during the first half of 2017, despite rising protectionist sentiment and increasing intervention in deals by governments and regulators. The outlook for the remainder of the year and beyond is positive, particularly with private equity (PE) investors returning to the deal table, now with record funds at their disposal.
Global deal value totalled US$1.4t in H1 2017, a modest decline of 4% against the same period last year. This decline in value can be attributed to a fall in megadeals above US$10b. Deals valued between US$1b and US$10b — the driving force behind M&A globally — remain on par with the same period in 2016. In terms of volume, the first half of 2017 experienced an uptick of 4%, with 18,363 deals compared to 17,642 deals recorded in the first half of 2016.
The figures from the first six months of the year show a strong deal appetite despite a highly complex M&A market, which poses new barriers to M&A. Several significant acquisitions were curtailed in 2017 due to pressures from various stakeholders, including activist investors and government authorities. The number of executives that walked away from deals as a result of concerns about regulatory or antitrust issues has almost tripled since 2016 according to the April 2017 edition of EY Global Capital Confidence Barometer.
Steve Krouskos, EY Global Vice Chair — Transaction Advisory Services, says:
“Geopolitical shifts and rising nationalism has brought additional M&A complexity, but companies are overcoming those barriers. Growth remains the number one priority, and M&A is a route to achieve that. However, given the changing environment, dealmakers may need a broader narrative around purpose and the concept of inclusive growth to keep all stakeholders onside.”
The return of private equity
Ten years after PE reached its peak as a driver for M&A, it is now poised to lift the deal market again. With record amounts of available cash (more than US$500b) at investors’ disposal, PE funds acquired US$124b of assets in the first six months of 2017 — up 14% year-on-year. There was an especially strong focus on Asian assets, with funds invested in this region tripling from US$7.6b in the first half of 2016 to US$23.5b this year.
PE firms currently have US$570b in capital allocated to buyout funds, far surpassing the US$478b recorded in 2007–2008. PE buyouts amounted to just over a quarter of that recorded in 2007. H1 2017 data indicates that percentage will increase this year despite heightened dealmaking complexity.
Krouskos says: “Private equity has been relatively quiet during the current deal-cycle. Given its dry powder power and a renewed focus on acquiring growth, we are now starting to see it re-emerge as a major player at the deal table. That bodes well for a strong M&A finish to 2017.”
UK M&A robust while Europe’s investment appeal returns
Despite the invoking of Article 50 of the Lisbon Treaty in March to initiate the UK’s departure from the European Union (EU), UK M&A remains very robust. UK inbound and domestic deal-making is up 35% on the same period in 2016 — prior to the EU Referendum in June of that year.
Krouskos says: “The political landscape has undoubtedly brought added complexity to the M&A market in the UK and beyond, yet the imperative for growth is yielding deals regardless. Executives recognize that the UK is open for M&A business and navigating uncertainty is a boardroom necessity today.”
In addition, Western Europe has re-emerged as a 2017 destination of choice among dealmakers. The region saw deals valued at US$339b in H1 2017, up 21% year-on-year — significantly higher than levels seen at the height of the Eurozone debt crisis.
Krouskos says: “Corporates and private equity are re-investing in Europe, which is a likely sign that dealmakers are seeing an end to Europe’s recent turbulence.”
Future-proofing the business is the new deal imperative
Recent acquisitions indicate technology and digital transformation are fueling far more deals than are being stifled by geopolitical change.
Krouskos says: “Tech and digital are set to remain the leading drivers of M&A for some time. Changing consumer preferences and disruption of existing business models mean that executives are continually reassessing and reinventing their portfolios to future-proof the business.”
The recent high-profile US$13.7b Amazon acquisition of Whole Foods is a clear example of M&A-led sector convergence and digital capabilities that are expected to be used by a business in one sector to disrupt another.
Deal activity in the first half of the year also shows a surge in businesses leveraging M&A and alliances in order to capture a potential boom in autonomous cars. Companies in both the technology and automotive sectors are buying and bonding through alliances to capitalize on the rewards on offer in urban mobility.
Krouskos says: “M&A is accelerating the convergence and blurring of sectors. Dealmaking and alliances are now the quickest way for companies to build the capabilities required to take advantage of fast-moving shifts in their respective markets.”
Dealmaking outlook remains robust for 2017
Available and cheap financing, strong balance sheets, record PE for buyout funds and a bulging deal pipeline all point to deals featuring prominently in the business growth equation for the foreseeable future.
Krouskos says: “Future M&A is expected to remain buoyant as dealmakers continue to pursue growth opportunities and technological advantage amid disruption. Deal markets have been stronger in the second half of the year in 14 of the past 20 years and in every year since 2012. Notwithstanding any major systemic shocks, we can expect M&A to continue at a healthy pace in 2017.”
EY Legal Services Contacts:
Richard Norbruis – Global Transaction Law Leader
Francisco Aldavero – Law Sector Leader – Private Equity