We are in the midst of an unprecedented M&A cycle that’s about to get more complicated. The first half of 2018 has been marked by a spate of megadeals that began to take off at the end of last year, despite uncertainties over US tax reform and antitrust laws. The number of deals north of $5 billion is on pace to double last year’s total, and to date has driven overall deal value up by more than 50%, according to a PwC analysis of Thomson Reuters data. Deals are also getting bigger, with more announced deals of at least $30 billion so far in 2018 than in all of 2017.
As US economic growth remains steady, that momentum should continue and will likely accelerate as lingering questions around tax policy and big vertical deals have largely been answered. The number of US deals has flattened in recent quarters, but this doesn’t necessarily signal the end of the M&A cycle. Unlike previous cycles – such as the years following the 2000 dotcom bust, when deals rose consistently each year – this cycle has been quite uneven, and the pattern will likely endure in the months ahead.
From a strategic perspective, the age-old notion of using M&A to scale is alive and well in today’s market. At the same time, technological and demographic factors continue to be as important in defining companies’ inorganic growth. Firms are looking to reinvent old business models and shed assets that no longer fit as the pace of technological change accelerates. This has contributed to an increase in the value of divestitures by 60% compared to the first part of 2017, according to Thomson Reuters data.
From a buyer’s perspective, these same forces have companies looking beyond their own sectors to expand into new businesses and therefore broaden their customer base. Since the start of 2018, one-third of megadeals crossed sector lines, driven largely by an appetite for new technologies. That interest in tech hasn’t been limited to huge transactions, with smaller deals coming in retail, media and printing.
Dealmakers still face some unknowns. For instance, data privacy concerns have led some governments to consider regulations on major technology firms. This sentiment has emerged and will likely grow in states like California, where lawmakers continue to explore privacy legislation. Meanwhile, the European Union’s General Data Protection Regulation (GDPR), aimed to protect individual data and privacy, took effect in May and will likely affect US companies that do business in the region.
Between a still-healthy economy and an abundance of capital, companies and PE firms largely continue to be well positioned for pursuing new investments. Even with the Fed likely planning more interest rate increases this year, some concerns about the economy overheating remain. One risk is if the central bank becomes too confident in the economy and raises rates faster than markets are ready for.
Absent that, investors will need to weigh their existing and potential capital and balance rising valuations with their need to reinvent old business models, as the benefits and risks of new technologies evolve. Even as divestitures add possible acquisition targets, finding the right target at the right time and at the right price can be challenging. Companies and PE firms that re-evaluate their strategies in light of the above influences will have an advantage in the second half of 2018 and beyond.
Bob Saada, US Deals Leader, and Curt Moldenhauer, US Deals Solutions Leader