In the first 6 months of 2018, M&A activity hit an 11-year high but as the year went on, intensifying trade tensions, political instability and increased regulatory scrutiny all took their toll on M&A activity. This hit both volume and value of transactions in the second half of the year. Of the top 20 deals by value in 2018, only 2 were completed in Q4 and eventually H2 2018 saw a 27.5% value decrease compared to H1 2018.
Despite this slowdown in activity, 2018 ended as the 3rd largest year by value according to Mergermarket records, with completed transactions totalling US$ 3.53tn.
Less volume, but more value: why?
This increase in value, according to Mergermarket’s ‘Global & Regional M&A Report 2018’, was the result of companies pursuing greater equity value via consolidation. This led to fierce competition for the choicest targets, hence the increased values. Additionally, bidding wars were made possible because of the availability of cheap financing due to historically low interest rates.
What sectors performed well?*
Ranked first and hitting its second-highest value on record, Energy, Mining and Utilities totalled US$ 673bn which was an increase of 26.9% compared its performance in 2017.
There was a new decade high of US$ 116.5bn for Construction, primarily driven by PE. This was close to Construction’s current record year, when in 2007 it was responsible for US$ 116.8bn.
Defence had a record year, generating US$ 28.8bn; high competition for government contracts is understood to be behind this record.
Another new high was hit in Business Services which saw US$289.3bn as PE interest grew in information providers.
Finally, despite deal count falling across the board, Agriculture saw a record number of transactions with 219 completed deals. The emergence of the North American cannabis industry was partly responsible for this growth.
Where did M&A suffer?
Chinese acquisitions of US firms fell by 94.6% to US$ 3bn; this is in stark contrast to 2016’s record year of US$ 55.3bn. This is a result of the aforementioned intensifying trade tensions.
Cross-border transactions fell by 6.6% to 6,405 while value remained similar at US$ 1.35tn compared to US$ 1.27tn in 2017.
Domestic investments count slipped to 12,827 from 13,115 but value increased 15%, going from US$ 1.9tn to US$ 2.18tn. This increase in value was driven by a need to consolidate in industries being most affected by disruptive technologies that are eliminating traditional barriers to entry. Mergermarket’s report predicts this will be a trend we continue to see throughout 2019.
What this could mean for M&A in 2019
With no end in sight to the challenging global economic scenarios listed in the introduction of this piece, to what extent will they impact M&A activity in 2019?
Willis Towers Watson believe that technological disruption, shifting consumer behaviour, the slowdown in the growth of emerging markets and record cash reserves will drive companies to get into the M&A market. However, they also predict targets will be expensive which is driving a heightened need to select targets carefully for growth; therefore 2019 will see real emphasis on target selection and diligence before completing a deal.
To put a value on this activity, research from Baker McKenzie forecasts total values of US$ 2.9tn for 2019.
Preparing for 2019
If 2019 is to be a year of highly selective decision making, it’s critical that the transactions you are involved in are executed as efficiently as possible.
* These states taken from the Mergermarket ‘Global & Regional M&A Report 2018’.