Deals industry insights

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Q2 2019 update: Competition for large assets makes megadeals even bigger

After the pursuit of high-dollar M&A trailed off at the end of 2018, it has accelerated in 2019. Both the number of megadeals – transactions of at least $5 billion – and overall US deal value in the first half of this year far outpaced the previous two quarters, according to a PwC analysis of Refinitiv data. Deal value almost matched the first half of 2018, which was the most in consecutive quarters since 2015. At more than $636 billion, Q2 US deal value was up 23% from the previous quarter and the second-highest in four years.

Why is value so high? Megadeals are getting even more mega, with multiple announced transactions of more than $50 billion, plus several other deals north of $10 billion. Valuations for many companies remain lofty, but acquirers – many trying to increase scale – have been able to call on cash, stock, debt and other financing in a capital-rich environment. Megadeals typically make up anywhere from 30% to 60% of overall US deal value. Last quarter, they accounted for 70% – the highest percentage since Q2 2015.

This isn’t to say other deals aren’t getting done. Of the transactions with disclosed values, the number of deals of $1 billion to $5 billion in value was up 18% in the second quarter, while those of less than $1 billion increased 5%. That activity shows that there’s been room this year for smaller bids along with the uptick in megadeals.

A diversity of investments through cross-sector deals

Many of these smaller bets have been companies acquiring different types of businesses, but that cross-sector appetite isn’t consistent across industries, Refinitiv data shows. For every active acquirer like consumer companies or tech firms – the cross-industry volume leaders – there are sectors such as transportation, logistics, oil and gas, where companies made only a handful of cross-sector deals in the first half of 2019.

With consumer and tech, the need for inorganic growth and to transform and expand scope has translated to strong interest in acquisitions outside their traditional spaces. That includes investments by digital platform companies that can cause disruption in other sectors, as a new measurement from PwC, the Industry Gini Index, shows. But while those companies make a lot of cross-sector deals – and deals, period – other sectors have actually seen a larger percentage of acquisitions from other industries.

Look at the hospitality and leisure industry, where different companies this year have acquired a photography business, audio and video equipment manufacturers, and consulting services. Or manufacturing, where several companies have bought data processing, computer programming and software publishing services. These types of moves illustrate how cross-sector deal activity is more than the collision of technology, consumer markets, and media and telecom, even if those areas still lead the way in deal volume.

Cross-border deals are up, but not the dollars

While overall US deal volume was down in Q2 2019, the number of cross-border transactions increased 5%, halting three straight quarters of declines. But with the quarter also seeing an 18% decrease in cross-border deal value, companies and PE firms are shifting to smaller deals in a geopolitical climate that remains highly dynamic.

Inbound US deal volume was up 10% in the second quarter but is still below the levels of the last couple of years. Inbound deal value was comparable to 2017 and 2018 but trailing the strong activity of 2016. Consider that Q2 2019 inbound deal volume was essentially the same as Q2 2016, but value was about 40% lower.

Outbound US deal value was down significantly last quarter and is well below last year’s levels, even after Q1 2019 value outperformed the previous two quarters. Outbound deal volume increased only 2%, again a possible indicator that US investors are still willing to look at assets in other countries, but at generally lower prices, awaiting resolution to various trade negotiations and regulatory discussions.

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Private equity has the ability to invest, but what about the appetite?

The amount of capital available for investment by private equity (PE) firms continues to rise, with data provider Preqin now putting it at more than $2 trillion. But while some PE firms have put money into play through M&A, that record amount of dry powder hasn’t translated to an overall surge in deals in 2019. PE deal volume was down 2% in the second quarter; value declined 31% and was about half as much as Q2 2018.

Most deals activity to date in 2019 has been in the tech sector, which accounted for about one-third of PE acquisitions in the first half of the year. With only a handful of acquisitions topping $500 million, PE tech deals largely have been more moderate investments in a range of areas, including machine learning, online lending, artificial intelligence and cybersecurity.

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Big moves in capital markets

Q2 2019 saw 71 US IPOs that raised $27.4 billion, according to PwC’s latest US Capital Markets Watch. Five IPOs raised more than $1 billion each, pushing overall quarterly value to its highest in nearly five years. Tech, media and telecom was the most active sector; 24 companies accounted for one-third of all Q2 IPOs and raised $16.3 billion. But after that sector and pharma, the largest IPO volume was special purpose acquisition companies (SPACs).

Unlike an offering for a specific company, SPACs essentially are vehicles to raise funds through an IPO with the aim of making a future acquisition. The number of SPACs in the first half of 2019 – 28, just behind pharma and ahead of tech, media and telecom – is well ahead of last year’s pace, nearly equal to all of 2017 and more than double the number in 2016. That growth is another example of investors having the capital and willingness to buy in today’s deals market, even if the right target isn’t available or ready just yet.

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What’s next for deals

Corporate and private investors continue to have the means to make strategic deals, whether it’s an industry leader making a major bid within its sector or a PE firm building its industry portfolio with medium or smaller investments. The access to affordable capital could improve further if the Federal Reserve decides to cut the US interest rate this summer.

In their pursuit of scale – whether they’re acquiring competitors or making strategic cross-sector investments – companies are exploring how deals can help them create stronger bonds with their customers. One key is maintaining and improving the customer experience through an acquisition. Consumers who are the end customers of a wide range of industries say they’re open to improvements through deals and have had a positive experience during past transactions. The key for acquirers going forward is to keep consistency and communication front of mind as they embark on deal execution and integration.

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.

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Colin Wittmer

Deals Leader, PwC US

John Potter

Partner, US Deals Sector Leader, US Consumer Markets Deals Leader, PwC US

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