By Nanette Heide and Rodrigo Sadi, Duane Morris LLP
In 2018, the M&A market was driven by optimism. Global deal value was the second highest since the 2008 financial crisis. Positive global growth, low cost of debt, investor support and CEO confidence combined to boost M&A activity. While deal count fell last year, value rose to $3.5 trillion – an 11.5% increase in value compared to 2017. Perhaps the biggest tailwind was the Trump’s administration’s implementation of tax reform, which gave strategic U.S. buyers more cash for acquisitions, including overseas funds. In addition, many companies chose to divest business lines either through a market transaction or to a competitor, which may have been in response to activists.
Although M&A activity in the first half of 2019 remained relatively strong, since then the pace has slowed compared to previous years. The U.S., for example, had its slowest first quarter by deal count in five years. Notably, deal value remained high in the U.S. during the first half of 2019, and, at $414 billion, represents over half of the global deal volume.
2019 is on pace to be a year of cautious optimism, due to the continued uncertainties buyers face, the most important of which are the US-China trade war and Brexit. At a close third, and perhaps gaining, is the use of home jurisdiction regulatory approval requirements to protect domestic industries. Amid heightened geopolitical risks and rising protectionism globally, domestic M&A accounted for 67% of the overall activity in 1H19 compared to a yearly average of 61.3% since 2010. For 2H19, it would not be surprising to see continued domestic M&A and industry convergence – using M&A for immediate growth by targeting adjacent industries or focusing on strategic integration in anticipated future high-growth markets and diversifying products.
So far, 2019 does not seem to be the year in which buyers pivot from the persistent trend of acquiring companies for their underlying technology. M&A in the technology sector has soared, mostly due to a drive by private equity and the growing demand for data analytics and cloud services from business of all sizes. With over 1,000 deals so far in 2019, the technology sector globally was responsible for 15.9% of deal activity by volume in 1H19 – a record for the sector’s half-year share.
The continued cautious optimism seems to be justified. While the confluence of factors that helped create optimism in 2018 – such as new tax legislation, a strong stock market and cheap financing – are still present, there is concern that economic forces could shift or that the impact of the current US Administration’s regulatory and trade policies still could negatively affect deal activity in the second half of the year. It is perhaps unsurprising that, going forward, companies should focus on wise spending; they will be watching as industry convergence and sector consolidation continue to impact M&A strategy, targeting and transaction activity.
Mergermarket – Monthly M&A Insider for FY 2018, available at https://www.mergermarket.com/assets/Monthly%20M&A%20Insider%20January%202019%20-%20FY%20Edition-vFinal.pdf
Mergermarket – Global & Regional M&A Report 1H19, available at https://www.mergermarket.com/info/node/49/done?sid=77873&token=513f7b898486a9716eae7d804025d64c
J.P. Morgan – 2019 Global M&A Outlook – Unlocking value in a dynamic market, available at 2019 Global M&A Outlook.
Financial Management, Dealmaking: The Outlook for Global M&A in 2019 (December 18, 2018)
Deloitte – The State of the Deal – M&A Trends Report 2019, available at https://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/articles/ma-trends-report.html
The Street, Expect Less M&A in 2019 as Big Year Comes to a Close (December 11, 2018) (citing Goldman Sachs)
Harvard Law School Forum on Corporate Governance and Financial Regulation – 2019 Midyear M&A Trends, available at https://corpgov.law.harvard.edu/2019/07/05/2019-midyear-ma-trends/
Nanette C. Heide is a partner and Co-Chair of the Private Equity Group, and Rodrigo Sadi is an associate, at the law firm of Duane Morris LLP.