The beginning of a new M&A season

Future of the deal

Mergers and acquisitions are undergoing a period of immense change.

Last year, global deal volumes climbed four percent to 49,612 deals, however deal values fell marginally by two percent to $3.1trillion, as megadeals slid. But in the first four months of 2018, nearly $1.7 trillion worth of deals have been announced, the highest activity since 2007.

This could be a new wave of mega-deals,or it may be a temporary flourish. To some extent, there is urgency to spend now, with the coming end of low interest rates and of liquidity-boosting quantitative easing (QE), firstly in the US, and soon in the Eurozoneand Japan.

Cash reserves are indeed substantial, with non-financial constituents in the S&P Global 1200 Index holding over $3.9 trillion,and private equity firms sitting on a record $1 trillion of investor funds. For private equity houses, which represent over a seventh of M&A market value, last year’s funding and positive debt conditions pumped up deals by 28% to $467 billion. We expect this gure to accelerate significantly in 2018, as deployment pressure soars.

As a result of the decline in the headline business tax rate from 35% to 21%, andallowing tax-effective profit repatriationand asset purchase expensing, millions of extra dollars will remain on the balancesheets of profitable firms.

This year we are expecting to see a rise in shareholder activism and the primary demands of these activists are centered around portfolio restructuring, innovation investments and operational efficiency.

Divestments grew to $472 billion last year, one of the highest levels since 2007. In a recent Deloitte survey, 70% of businesses said they expect to make at least one sell-off in the next two years. They will need to prepare and hand over with immense precision.

The dizzying pace of technological innovation has unleashed a fundamental shift in M&A, last year nearly 60% of disruptive technology acquisitions were done by the non-tech sector. Throughout 2018, firms will be alive to disruptive shifts,building on 2015-17 spending of $634 billion of related acquisitions. Companies’ very survival depends on their ability to serve evolving customer demands and create business models for the future, as industries digitise and converge.

Many corporates will spend cash assertively to beat incoming economic and disruptive challenges. For others, the changing supply of liquidity and debt will rattle nerves and provoke hesitancy. Given the economic environment, and seismic shifts such as Brexit, US and Chinese trade tariffs, and Chinese capital controls, buyers have the choice to sit still or take the reins of change. Focus on target selection, diligence and execution will be paramount to capturing success.

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