Halfway through 2017: With no dramatic shifts, deals on track for a steady year

PwC’s Deals mid-year review and outlook

So far, 2017 isn’t quite the year many deal forecasters were expecting. But at the midway point, it looks on track for a finish that won’t leave dealmakers gritting their teeth.

A deals market that had a bullish start in 2017 — anticipating what a new, business-friendly government administration might do — has calmed along with the stock market. But deal volumes are up over 2016, suggesting the fundamentals are in good shape.

Businesses appear to be giving a vote of confidence to an economy growing steadily, if not spectacularly. They’re still striking deals and taking long-term opportunities. They’re getting on with growth and likely won’t be knocked off their stride by turbulence in Washington. Indeed, the early thoughts of “we’ll see what happens” with new policies and regulations may be giving way to “we’ll believe it when we see it.”

Money is still cheap and plentiful, with private equity firms and corporate balance sheets having plenty of dry powder at their disposal. And the intervals between rate rises might well be longer than seemed likely at the start of the year. Boards might also want to signal strength to shareholders with an acquisition.

So what can we expect for the rest of the year? Let's explore some key findings.

Recapping 2017 so far and looking ahead

It was going to be the year government put fresh wind in the sails of the deals market. It now seems more likely that the market will run on its own momentum for at least the near future. Certainly, measures like the widely-touted tax reforms, including the prospect of a tax holiday for cash repatriated from overseas, would likely put a spring in the market’s step. In theory, businesses with more available capital could seize the opportunity to grow through M&A.

But other signals look clearer. Pending megadeals — deals at least $5 billion in value — could suggest more political tolerance for transactions that previously may have raised concerns about competition. That would fit the administration’s broadly anti-regulation stance. So would its stance on the Dodd-Frank banking regulations. The government says it’s ready to review a regime seen by some as a barrier to growth. But once again, such a controversial change is bound to be a long time coming.

Sector activity is also broadly in line with the same period in 2016. Technology continues to lead the way and is joined by consumer. As we noted in our Q1 industry analysis, established businesses are modernizing through technology-focused deals, making traditional industry boundaries blurry and unconventional. Tech and consumer have accounted for about one-third of deal activity, while industrial products and financial services made up about one-fourth of deals — similar to the same period last year. Eyes will be peeled for any sign that mid-June’s dip in the Nasdaq technology index is anything more than profit-taking.

In PwC’s Global CEO Survey, four out of 10 CEOs said their companies are targeting the US for their growth prospects. That was reflected in the 6% rise in inbound deal volume through Q1 2017. A few months later, the pace has picked up, with year-over-year volume up 10% through May. This could be a sign that overseas businesses are looking to the US to compensate for uncertainties in markets such as China, South Korea and Russia, where economic prospects aren’t as stable. The US is rich in the desired tech start-ups that some traditional businesses need to reinvent themselves. Not surprisingly, tech deals make up nearly a quarter of inbound deals so far this year. Their attractiveness seems unlikely to tail off despite the high valuations that a relatively strong dollar naturally creates.

Beyond M&A, other deal activity can offer signs of life in the economy. Divestitures year-to-date are up 9% from 2016, with virtually no change in value. The activity could signal many things — companies refocusing activities, raising capital for fresh acquisitions or spinning off successful units. More sell-offs could be a sign of more economic activity, especially in sectors such as industrial products and consumer, which accounted for more than one-third of all divestiture activity so far this year. Divesting underperforming business units is also a tried-and-true tactic for fending off activist shareholders, which have gained notoriety in recent years for high-profile campaigns.

Steady as she goes for the rest of 2017

Based in part on performance to date and the lack of significant disruption so far in 2017, we see the deals market likely holding steady for the rest of the year. Activity has broadly mirrored 2016 so far, and it will take a large, unexpected development to blow it off course for the rest of the year. 

Although volume so far outstrips last year by 12%, we should remember that M&A surged late in 2016 in the wake of the US presidential election. There’s no such pent-up demand this year, so volume could finish roughly in line with last year.

Read the full report for more insights and analysis.

Contact us

Bob Saada
Partner, US Deals Leader, PwC Deals
Tel: +1 (646) 471 7219
Email

Neil Dhar
Partner, PwC Deals
Tel: +1 (646) 471 3700
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