05 Jan, 2018
Last Year M&A Review and New Year Outlook
Looking back: Buyers saw fewer targets as valuations soared
For most of 2017, the M&A picture was mixed: In the US, buyers continued acting on historically low borrowing costs and a strengthening economy. The stock market has hit record highs, while at the same time the November unemployment rate remained at its lowest since 2000. As the economy gathered momentum, the market became too expensive for many buyers, who thought twice about making major moves in the face of rising valuations for potential acquisitions.
Parts of Europe and Asia drove inbound and outbound investment, while the Asia-Pacific led the way in new stock listings. The region surpassed the US to become the dominant IPO region, as many US companies flush with private capital demonstrated little urgency to go public. Of the more than 1450 IPOs so far this year, roughly two-thirds originated from the Asia-Pacific, helping put 2017 on track to become the busiest year for new listings through 2007.
Looking ahead: Megadeals poised for a comeback
Recently, M&A values have picked up significantly, with a record dollar amount in deals announced at the end of 2017. That could herald a comeback for deal values and megadeals — those worth more than $5 billion — in the year ahead.
Whereas the last M&A boom in 2015 largely included deals between direct competitors trying to gain scale and cut costs, the landscape for megadeals in 2018 could look far different. Some companies are trying to remain competitive as new players — particularly tech giants — move into their industries.
The need to adapt has rippled into recent deals that are either under discussion or awaiting approval. Take CVS Health Corp’s roughly $69 billion bid of Aetna Inc., Walt Disney Co.'s interest in 21st Century Fox Inc.'s assets, Broadcom’s $105 billion bid for Qualcomm and AT&T Inc.'s planned purchase of Time Warner Inc. These say a lot about not only the types of deals to come but their scale as «gigadeals». Many will be watching the government’s response, particularly as AT&T prepares to go to court after the US Justice Department blocked its approximately $85 billion bid for Time Warner.
From startup to M&A target: AI as the next driver?
Emerging technologies is another area to watch in 2018. In recent years, investors have poured capital into technologies that have yet to go mainstream, but not all have advanced much beyond backing from venture capitalists. Since 2012, investors have invested more in AI than any other emerging technology, including IoT, augmented reality and 3D printing, according to a PwC analysis of CB Insights data.
This suggests that in the coming years, AI could lead the way in deals, given that nearly half, 47%, of all AI companies acquired since 2012 have had VC backing. Already, tech companies like Google, Yahoo, Intel, Apple and Salesforce are competing to acquire private AI companies. Ford, Samsung, GE and Uber are also investing in this space, and the list will likely grow. Consider that since 2012, more than 250 private companies using AI algorithms across different verticals have been acquired, including 37 acquisitions alone at the start of this year.
Europe’s comeback amid populism
Even though the shock of Brexit and the US presidential election lingered through the start of 2017, it didn’t discourage investors at home and abroad as the Eurozone economy rebounded in big ways. After Canada, the UK and Germany, respectively, led the way in both US outbound and inbound investment through 2017.
This doesn’t mean that populism has softened; if anything, it’s likely to continue rising, as European nations consider tighter restrictions over foreign investment and mass migration. The turnaround coincides with the political sentiment for creating European champions to counter US and Chinese economic influence. The bloc’s recovery from its sovereign debt crisis is still fragile, particularly Britain’s economy as its EU departure looms. But the Eurozone is closing 2017 with unemployment at its lowest in almost eight years and economic growth back to levels not seen since 2011. This comes as France’s new president, Emmanuel Macron, has settled into office and publicly championed the EU.
Eastern Europe has benefited from the brighter outlook. Unemployment rates in Poland, the Czech Republic and Romania are at all-time lows and well below the European average. The momentum will likely continue if the Eurozone continues to grow, as almost two-thirds of the value of Eastern Europe’s exports goes to the EU.
As economic reforms play out, including measures to improve France and Spain’s labor markets, growth could accelerate and help drive M&A next year. The recent increased interest by activist investors in European companies also could be a factor.
China as a wild card
After a record year in 2016, the pace of outbound mergers and acquisitions by Chinese firms slowed
significantly as China’s government grew concerned that too much money was leaving the country.
Officials limited investments in certain industries, including sports and hotels, which left investors
holding off on deals as the rules became less clear.
Those uncertainties have eased following October’s Communist Party gathering in which President Xi Jinping underscored the need to continue pursuing economic reforms and did not announce new restrictions over foreign investments. This signals that China could see an acceleration of deals, and its push for infrastructure investment will likely be a key driver. Moreover, the country plans to remove foreign ownership limits on banks, giving global financial companies unprecedented access to the economy.
But as China opens its doors, the US has tightened its borders. Earlier this year, the Trump administration blocked a Chinese-backed investor from acquiring a US semiconductor maker following concerns from the Committee on Foreign Investment in the United States (CFIUS) that the deal posed national security risks. The president’s move was rare but not surprising in the sense that the US has been serious about protecting America’s high-tech industry. Lawmakers have proposed a bill calling for stiffer CFIUS reviews; whether Congress approves the legislation, CFIUS will almost certainly weigh more heavily on Chinese investors newer to the US market.
What to expect in 2018?
After the decline in megadeals in 2017, investors are likely to enter 2018 with deal values rebounding. Companies are strategizing to thwart competition from tech giants at a time when activist investors gain unprecedented influence. But as companies scale down and leverage growing markets, tech firms are steps ahead.
The availability of capital has been fueled by near-record private equity fundraising, historically low interest rates and the potential that US lawmakers could repatriate overseas cash back to the US through legislation now being discussed in Congress. And Europe and China also are poised to drive deals, as ongoing economic reforms improve the prospects of investment in these regions.
Companies and investors will need to continue adapting to these influences. An abundance of capital alone may not conquer high valuations, especially amid evolving technology, shifting demographics, political uncertainty and other disruptors. Acquisitions, alliances and other transactions will happen, but success comes not in making a deal, but making the right deal.
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