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Q3 2019 update: M&A volume edges up, with capital flowing beyond megadeals

After three quarters of decline, US deal volume was up in the third quarter of this year, with increases in both corporate and private equity (PE) transactions, according to a PwC analysis of Refinitiv data. Despite the 4% rise in Q3, M&A volume remains down year-to-date from 2017 and 2018, which was the most active two-year period for deals in history. Sustaining those highs was likely going to be difficult, especially as the current economic expansion has endured to a point that fears of a downturn have grown.

But many corporate and private investors also still enjoy a healthy access to capital, and the recent uptick in volume may indicate that buyers won’t fully retreat even if the economy slows. What could shift is the recent wave of megadeals. Between capital availability and high company valuations, megadeals—transactions of at least $5 billion in value—flourished in 2018 and the first part of 2019. Last quarter, however, saw the fewest megadeals since early 2017, and total US deal value was at its lowest level in almost six years.

Excluding megadeals, Q3 deal value was up 8% from Q2—the second consecutive quarter in which value increased. Some of this value is in transactions just below the megadeal level, with announced deals of $1 billion to $5 billion in value increasing each of the past two quarters. Deals in this range have been spread across several industries in 2019, while private equity has accounted for one-fourth of not-quite-megadeal volume. In this capital-rich environment, some companies have determined they may not have to go to the highest level for an asset that could help drive growth.

Divested assets drive deal volume in many sectors

At the industry level, technology and consumer are seeing the most deals this year. But the biggest increases in Q3 volume came in other areas, including chemicals, power and utilities, financial services, health services, and engineering and construction. And some higher-frequency sectors continue to see mostly lower-value deals. One out of 10 deals this year has been in consumer markets, but those account for only 3% of year-to-date deal value. Compare that to pharma, where megadeals have helped the sector capture 17% of overall deal value—with only 5% of total deals.

Some of the recent volume growth has been driven by acquisitions of other firms’ divested assets; health services, for instance, saw nearly twice as many divestiture-related deals in Q3 than Q2. Along with the above industries, oil and gas and pharma saw a notable jump in divestiture deals in the last quarter.

Divestitures also have become a bigger part of megadeals, with a majority of Q3 megadeals involving owners selling only parts of their organizations to buyers. Pharma is a leading example, with multiple deals. But bidding for divested businesses also has been happening in other sectors, ranging from tech to oil and gas.

What’s next for deals

  • Divestitures are likely to remain firmly in the M&A mix as many companies re-evaluate their operations and growth strategies in an economy that’s expected to slow down. Anything that isn’t critical for the overall corporate or portfolio strategy could be in play and could command a good price while valuations remain elevated. Already since last quarter, a telecom giant has agreed to sell some businesses as part of its debt-reduction efforts.
  • There’s been little pullback in buying tech so far in 2019. About 40% of Q3 deals crossed sector lines, and tech firms continue to be top targets. Along with PE firms, sectors such as financial services, health services, engineering and construction, and manufacturing all have shown increased interest in tech this year. Those investments should continue as multiple sectors leverage emerging technology for efficiency and transformation.
  • Geopolitical uncertainty could keep some cross-border activity in check going into 2020. There’s been an uptick in US companies acquiring assets in other countries, and overall cross-border deal volume leveled off in recent months after three quarters of decline. But Q3 inbound deal volume was the lowest in five years. The US remains a desirable investment destination, but barring a significant policy shift from the current presidential administration, interest from non-US buyers could face obstacles.
  • For more on the current deals landscape and outlook for the coming months, read the latest Deals Industry Insights commentary by John D. Potter, US Deals Sector Leader.

Contact us

Colin Wittmer

Deals Leader, PwC US

John Potter

Partner, Deals Sectors Leader, PwC US

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