From the US presidential election, to Brexit, to ever-changing economic performance, 2016 has been an eventful year. This unpredictable environment made 2016 somewhat slower for deals—a sharp contrast to the record-breaking years of 2014 and 2015.
But there are signs of a shift. For a start, global deal value broke new records in October, with almost $500 billion of agreements announced. And despite uncertainty going into 2017, pent-up demand and recent signs of increased activity suggest more opportunities for companies in the year ahead.
A few factors are changing the mood. Deal traffic started picking up even before the US presidential election. Some companies perhaps felt compelled to strike before the change in administrations in Washington. Another motivator may be the potential for higher interest rates, which could boost the cost of some deals.
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Cross-border deals still are a vital part of the mix, and the best dealmakers will scour the world for the right fit. Interest from China is likely to be a major factor in the coming years. On a recent visit to China, leading PwC M&A specialists saw many indications that Chinese investment in the US is set to grow.
The US dollar is strong, and its role as the global reserve currency means it’s still a haven in uncertain times. Meanwhile, China’s economic transition is creating conditions for investment outside the country. In many cases, Chinese firms are interested in US assets both for the security they offer and for stronger growth compared to other regions, such as Europe.
The size of this investment may be surprising, though. China’s two decades of breakneck growth have created a large surplus. Some of that is invested in Chinese infrastructure, with plenty of railroads and highways built in recent years. But Chinese funds still have billions of dollars looking for a new home, and a good chunk of that money is probably headed for the US.
Chinese businesses typically have invested in US-based technology or other intellectual property with the intent to take it back to China. What may be different now is that investors seem to be looking to run their businesses in the US and pay a premium for it. We expect to see this especially in sectors like health, technology, media, telecommunications, hospitality, and retail and consumer.
Some concerns remain about Chinese investment in the US economy. Cultural challenges will be similar to those during Japan’s investment in the US during the 1980s. Management teams from China will have to learn the ins and outs of US culture if they want to be successful. There are also the unknowns represented by the incoming Trump administration.
When considering the sectors that are drawing strong investor interest, it’s important to note that M&A and alliance targets are increasingly appealing to companies in other industries. Buying the right tech company, for example, can help companies evolve in their field. One example is Daimler AG’s $562 million investment in US startup Matternet to develop drones for its delivery vans.
Indeed, technology remains one of the hottest areas. The cloud, the Internet of Things (IoT), and artificial intelligence and machine learning all are attracting interest from buyers in many parts of the economy. Tech companies want to stay ahead of the pack, while non-tech companies frequently look at a tech deal as a way to enhance their own capabilities or support their disruptive strategies to change the competitive landscape.
Within the energy industry, oil and gas companies had a rough year, marked by low prices that forced rigs and fields to shut down. But there are signs that the sector has begun redirecting vulnerability into strength. Prices have risen slightly, and dealmakers are taking long-term positions ahead of an expected recovery. But with the timing of a turnaround still vague, some firms may look at acquisitions. Already, major players such as Schlumberger and Technip have swallowed smaller rivals, while other companies recently announced IPOs.
Telecommunications shows similar deal drivers as technology. With changes in the broader telecom sector, leaders are pushing firms to combine distribution and content. That’s driving consolidation and rearranging the competitive landscape as traditional firms respond with their own moves.
Dealmakers face an uncertain landscape in 2017, but they remain alert and ready to strike when conditions are favorable. To be sure, the recent US elections and potential impact on the geopolitical landscape have raised questions about the opportunities for some deals. Yet the US market remains attractive for companies in many industries, and it’s still too early to tell if the new presidential administration will bring trade and regulatory changes that may make some deals more manageable and others not.
Among the factors that could drive more deal activity in 2017 are the interest in cross-industry and cross-border acquisitions and the availability of capital for investments. Ultimately, as businesses in several sectors continue to explore growth, dealmakers will watch conditions closely and be prepared to pursue an acquisition, merger, alliance or other deal that’s the right fit for their company.