Deals industry insights

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Q1 2019 update: With major consolidation plays in multiple sectors, M&A values stay high

Deals activity in 2019 is being defined by companies in a range of industries making big moves to capture market share. Although total US deal value is down from a year ago, the amount of M&A investment in the first quarter jumped 35% from the end of 2018, with more than $509 billion in announced transactions. That includes more megadeals—transactions of at least $5 billion in value—than in each of the last two quarters, led by deals in pharmaceuticals and life sciences, media and telecommunications and technology.

Amid these moves to boost scale, cross-sector deals are holding their appeal, accounting for almost half of Q1 deal volume. Technology, consumer markets and media and telecom have been the most active, with companies in those industries both pursuing investments in other sectors and drawing the most interest from other sectors.

But the most significant investment is occurring within industries. The share of Q1 2019 deal value included in transactions by companies in the same sector was up significantly from 2018. The wave of pharma megadeals meant most of that industry’s total deal value was captured in major scale plays. Other industries that posted substantial deal values, such as banking, also saw that investment stay within their sectors. Outliers – in which a majority of deal value was in cross-sector deals – included manufacturing and media and telecom.

A shift in cross-border deals

A shift in cross-border deals

Slimming portfolios make assets available

Nearly one quarter of Q1 corporate deals involved divestitures, as companies continue to reevaluate how operations and capabilities fit with their investment strategies. Some sellers are adjusting to win regulatory approval or responding to shareholder activism around profitability and growth potential. Such moves put assets into the market that appeal not only to competitors but also private equity (PE) firms that continue to attract high levels of capital ready for deployment.

Some divestitures may have raised eyebrows but aren’t totally unexpected, as conglomerates continue to narrow their portfolios of businesses. With others, executives have clearly stated a goal to refocus on expansion in other areas. And not all divestitures have been sales, with some companies announcing spinoffs along with M&A. Other spinoffs have been in response to shifts in established sectors, followed recent fundraising in growing industries or are adapting to changing customer bases.

Customers explain the impact of M&A and deals

As companies in various sectors, especially those with a strong consumer element, increase their focus on the customer experience, a new PwC survey reveals how consumers have been affected by M&A and how they would react to future deals.

CX in M&A, part of PwC’s Consumer Intelligence Series, found that consumers generally view deals as positive, with the potential to bring many improvements that benefit customers. Of the more than 7,800 people in six countries who were surveyed, 61% had been customers of companies that went through a merger or acquisition, and only 20% of those consumers said the experience was negative. More than 80% did the same amount or more business with a company after a deal.

As for future M&A, 70% of consumers said they’re willing to wait and see how the new company develops. But issues can arise when one brand or reputation isn’t as strong as the other; almost half said that if a company they liked combined with one they didn’t, they wouldn’t remain a customer.

A shift in cross-border deals

Leading up to M&A or IPO

Looking at the pipeline of companies that could be acquired or go public in the future, the Q1 2019 MoneyTree Report by PwC and CB Insights noted investments of at least $500 million in multiple unicorns—startup companies valued at $1 billion or more. Those investments contributed to expansion- and later-stage deals, capturing a greater share of total US venture capital (VC) funding—34%, up from 30% a year ago. Other startups are seeing earlier buyouts by established players looking to build out a new market, as well as PE firms that previously may have been more wary of early- or mid-stage companies.

The US unicorn ranks grew by 10 in the first quarter, bringing the total to an all-time high of 147. Q1 also set a record for aggregate unicorn valuation, as those companies reached a combined value of $582 billion. At the same time, median years from first financing to exit through M&A declined from Q4, as did median years to IPO; both were roughly five years.

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Cross-border deal value rises

Cross-border deals continue to decline in volume; Q1 was down 18% from the previous quarter, the third straight decline. But cross-border M&A value rebounded. The 16% increase was paced by seven megadeal announcements with a combined value of more than $69 billion, as well as a substantial increase in investment by US buyers in non-US companies—nearly double the value of Q4.

The technology, consumer markets and pharma sectors saw the most cross-border corporate M&A activity, accounting for almost two-thirds of deal volume. But similar to overall activity, all three sectors saw fewer deals than in the previous quarter. The number of cross-border technology deals in Q1 declined 7% from Q4 and 26% from a year ago, as companies are navigating more government scrutiny in the US and other factors.

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The pursuit of productive partnerships

Uncertainty about the length of the current economic cycle, pressures in certain industries and other issues led some companies in Q1 2019 to explore alliances and partnerships—either instead of, or in addition to acquisitions. The mining industry saw a proposed megadeal shift to a joint venture that allows the companies to combine assets and cut costs. In the media sector, a new joint venture will create a streaming video service that could involve additional partnerships for content.

As new alliances form, some existing ventures have evolved to acquisitions. From agribusiness to footwear, companies that originally partnered with others have moved to bring businesses entirely in-house. Other organizations that are considering the best way to deploy capital in a high-valuation environment may consider similar bids for full control of JVs.

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What’s next for deals

Larger forces are likely to keep some companies flexible on deal decisions in the months ahead. Businesses in many industries made adjustments ahead of the originally scheduled date for Brexit, only to see the deadline extended to October 31, 2019. The Trump administration last October announced a new trade agreement with Canada and Mexico, but six months later its status remains uncertain.

While other countries have seen signs of a downturn, the US economy remains resilient. PE firms have plenty of dry powder. With companies still holding large amounts of cash on balance sheets, acquisitions, JVs and other deals will remain an option for longer-term investment, especially if the appetite for buybacks and other short-term outlays wanes. This especially could be a factor as more non-tech companies consider emerging technology investments that can better position their organizations for the future.

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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