In the first six months of 2018, worldwide M&A volume shot up by 60% compared to the first half of 2017, reaching $2.5 trillion, said Jeremy Swan, managing principal, financial sponsors industry for CohnReznick. In the midst of a strong and highly liquid market in both equity and debt, the total for 2018 could reach $5 trillion. And that’s despite uncertainties over trade, tariffs, and interest rates, Swan said.
Much of the growth came from mega deals, which hit levels not seen since 2007, Swan said. Some 38% of global M&A deals were of $10 billion or more, and almost 50% were deals of $5 billion or greater. The first half also saw intense activity between countries, as cross-border deals made up 40% of total volume, despite a large drop in Chinese purchases of US assets, he noted. Much of the activity has been driven by strategic buyers who often can outbid PE buyers. “That said, we have seen a steady increase in the percent of deals closed by financial sponsors globally,” Swan said. “That’s a trend we expect to continue, because we have close to $1 trillion available globally that financial sponsors need to put to work.”
A squeeze of the middle market
Notably, while mega-deals dominated, another 40% of volume was driven by deals of $25 million or less. “This leaves a very small component in the middle market,” Swan said, “where we haven’t seen a lot of activity.” That’s a big change from the past several years which featured a high level of middle-market action. The greatest M&A activity occurred in three industries: media/entertainment, health care and telecom. In these markets, “large companies are seeking to acquire more growth, more vertical integration, and more technology,” Swan said. “They are expanding into new industries and new geographies.”
Companies are also acquiring smaller companies to add technical or executive talent, said Elizabeth Sanders, chief counsel, transactions/M&A at Panasonic.
Tax reform juices M&A
The passage last year of the US Tax Cuts and Jobs Act, which lowered the corporate tax rate to 21% from 35%, among other changes, has helped the M&A market, said Jeff Marks, managing director, corporate finance advisory at JP Morgan. “It feels like the US is much more competitive on a global basis in terms of tax policy, with the caveat that there are wild cards that may not be tax-related,” Marks said.
The most notable wild cards are tariffs and trade wars that are ratcheting upward. “It’s harder and harder to do strategic transactions in a global market where supply chains are as integrated as they are,” he said, “and you can’t figure out what you’re going to pay within your own company for business services.”
The US tax law changes also influence how to structure deals, Sanders said. Consider whether it makes more sense to create a c-corporation or a pass-through, for example. Other changes include how to value intangible assets and the allowable uses of net operating losses.
Jeremy Swan, is the managing principal of CohnReznick’s Financial Sponsors and Financial Services practice. In addition to managing a multi-disciplinary team of professionals across various service lines, he advises financial sponsors and their portfolio companies in mergers & acquisitions, IPO readiness, financing transactions, post-acquisition integration, and operational and financial due diligence. He can be contacted at firstname.lastname@example.org, or 646-625-5716.