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.
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.
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.
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.