Q4 2018 Deals Industry Insights: Capital across sectors should keep M&A activity steady in 2019

10 January, 2019

John Potter
Partner, Deals Sectors Leader, PwC US

As we shared recently in the PwC Deals year-end review and 2019 outlook, the continued availability of large amounts of capital is likely to be the biggest influence on acquisitions, divestitures and other transactions in the year ahead. From cash on corporate balance sheets to private equity (PE) dry powder to overall debt capacity, business leaders will be able to tap various buckets when they’re ready to make a deal.

At the industry level, this activity won’t be limited to transactions by traditionally capital-intensive businesses, such as oil and gas, telecommunications, transportation and heavy manufacturing. Just as we saw in 2018, many companies in sectors such as technology, pharmaceuticals, healthcare and consumer products have the liquidity to pursue M&A. In addition to megadeals of at least $5 billion in value, more and more companies are putting their money to work on deals in the $1 billion to $5 billion range.

Here’s how some of the big themes for 2019 deals are reflected across different industries.

Bigger bids stay within sectors

There’s no question that many companies continue to explore M&A in other industries; cross-sector deals have been at least one-third of US deal volume each of the past few years. But a PwC analysis of recent Thomson Reuters data shows that larger investments are more likely to remain within a company’s own sector. And this pursuit of scale could be stronger in some sectors than others going forward.

Looking at the volume and value of US corporate M&A in 2018, several industries saw greater concentrations of M&A value within their sectors. Consider pharmaceuticals and life sciences, where about half of last year’s deal volume stayed within the sector, while two-thirds of the deal value did. The media and telecommunications industry was even more pronounced: About 50% of the deals involved companies in other sectors, but those transactions represented less than 10% of deal value, as more than 90% remained within the sector.

Technology, consumer and healthcare also saw significant concentrations of deal value within their sectors last year. Other industries, such as industrial products, chemicals, energy, utilities and mining, had more balanced activity, with about two-thirds of both deal volume and deal value staying within those sectors. And financial services was the only industry where there was less deal value than volume in the sector. On the whole, though, companies that have been willing to make deals across sector lines have pursued generally smaller transactions.

Moderate bets on emerging tech

When companies do explore investments outside their sector, technology is often a factor. Our previous Deals Industry Insights showed how tech companies were the most popular targets as far as deal volume, and the latest PwC Digital IQ survey provides further insight on which technologies are drawing the most investment, including M&A. And remember we’re seeing earlier-stage buyouts of venture businesses by established players.

The Digital IQ survey of 2,280 executives in more than 60 countries found that mobile technology was the top tech for substantial investment, chosen by 80% of execs. Cloud technology was next at 70%. Most emerging technologies ranked much lower, with artificial intelligence (AI) at 8% and robotic process automation (RPA) at 6%.

However, when executives were asked specifically about technologies their companies will invest in through acquisitions or alliances, AI ranked first at 52%, followed by RPA at 37%. By comparison, 13% said cloud, and only 6% said mobile. So expect a shift in where capital is flowing if it follows the strategic priorities.

This inversion suggests companies are putting big money into more developed technologies – mobile and cloud – and are interested in acquiring or partnering with emerging technologies, but mostly through smaller bets. That aligns with a recent PwC analysis showing mid-sized deals for Fourth Industrial Revolution (4IR) technologies might better benefit company shareholders than large-scale M&A.

Non-core corporate assets draw interest

The pace of companies carving out businesses for spin-offs or sales isn’t abating, as many conglomerates and large corporations tighten their strategic focus and look to reallocate capital from divestitures for other investments. This activity has been brisker in some sectors than others, and in many cases PE buyers have added the divested units to their portfolios.

Consumer companies made up the largest percentage of divestiture volume in 2018, including such sales as Nestlé’s US confectionery businessKroger’s convenience store business and Acxiom’s marketing solutions business. Industrial products saw the next most divestitures, with such announcements as GE agreeing to sell its 111-year-old transportation business to Wabtec and Energizer agreeing to buy Spectrum Brands’ battery business.

PE firms also remain interested in corporate divestitures, eyeing not only consumer and industrial companies but also real estate, tech and energy assets. Pharma, healthcare, and media and telecommunications have drawn less attention.

While overall US divestiture volume in 2018 was down from the previous year, value was up. In other words, plenty of high-value businesses have been on the block and found willing buyers – something I expect will continue in 2019.

Customer experience influencing investments

The increasingly intense competition for customer experience also will motivate companies in certain sectors to make deals in 2019 and beyond. For instance, media companies continue to explore more avenues for delivering high-quality content to customers. Acquisitions and partnerships that can help build loyalty and “stickiness” among audiences – while still keeping customer data secure – will be key to differentiating media companies and improving their chances for long-term success.

The growth in streaming and on-demand media could have an impact not only on other entertainment, such as live events, but also parts of the consumer space – namely hospitality and leisure. Consumers already have access to personalized and in-home activities and experiences that weren’t available just a few years ago. Emerging technologies such as virtual reality and augmented reality could change that further and move companies focused on live or on-site experiences to consider new investments that motivate people to get off the couch and spend money outside the home.

It’s not a stretch to see this focus on better customer experience extend to more essential sectors. Healthcare and financial services companies have made strides in giving customers easier access to and control over their information, but both sectors continue to wrestle with the right balance of digital and in-person customer interaction, all while managing sensitive data.

In all of the above industries, companies will have to rethink the best path to gaining market share while maintaining and improving customer experience. Is it a pure geographic play, acquiring physical assets and talent? Is it expanding mobile and interactive technology with existing customers and growing through word of mouth? A combination of the two? The ongoing evolution of consumer behaviors has great potential to influence investment decisions – and add another intriguing element to what should be an active year for deals.

For more details on Q4 and full-year 2018 deals activity, including individual sector reports, be sure to visit PwC Deals Industry Insights on Jan. 24.