Deals industry insights

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Q4 and full-year 2018 update: Appetite for M&A endures amid global tensions

As companies in many industries face larger dynamics that raise new considerations for acquisitions, alliances and other transactions, US business leaders are confident that the core elements for executing deals remain strong in 2019.

In PwC’s latest CEO Survey, a majority of US executives said their companies are planning M&A in the year ahead, far outpacing CEO enthusiasm globally. Perhaps more telling, both global and US CEOs are largely unconcerned about having access to affordable capital. Those high expectations of readily available funding—whether it’s cash in hand or inexpensive debt—could be significant as deal opportunities emerge.

Corporate and private equity investors are still navigating uncertainty caused by disruptive events, including the longest US government shutdown in history and the debate around Brexit. Even so, 2019 already has seen multiple announced megadeals—transactions of at least $5 billion—in sectors ranging from biotechnology and pharmaceuticals to mining to financial technology. Those bids could be a prelude to other large acquisitions, as both whole companies and divested businesses come into the crosshairs of buyers that are flush with capital.

A shift in cross-border deals

A shift in cross-border deals

An uptick in bigger acquisitions

The hot start for megadeals comes after a surge in 2018; 28 more deals were announced than in 2017, making a total of 77— the third-highest ever, according to a PwC analysis of Thomson Reuters data. Technology led the way among sectors in megadeal volume, with several more than the previous year, followed by power and utilities, consumer markets and media and telecommunications.

M&A volume also increased at the near-megadeal level, moving from $1 billion to $5 billion in transaction value; the 250-plus deals in that range were the most in more than a decade. Much of that deal volume and value was concentrated in the tech, energy and pharma sectors, with consumer markets and real estate also seeing a fair amount of large deal activity.

Overall, 2018 US deal volume was down 7% from the previous year’s record high, but was still the second-highest volume in the past 20 years, including pre-recession levels. And with the wave in megadeals, overall US deal value increased 28% to more than $2 trillion—its highest point in three years.

Cross-sector interest, but not at the expense of scale

As many companies reassess their business models and avenues for growth, cross-sector deals have become more prevalent in some industries than others. More than a third of US corporate deals in 2018 straddled sector lines, with media, telecom, pharma and life sciences companies most aggressively exploring acquisitions outside their spaces—to the tune of almost half of all deals in those industries. The most popular industry targets for cross-sector deals included media, telecom, consumer and tech companies—the last perhaps a product of growing interest in emerging technologies and increasing industry specialization by many tech firms.

Yet cross-sector deals as a whole have typically been smaller bets compared to acquisitions within sectors. All but a handful of last year’s corporate megadeals featured buyers and targets in the same industry. As for all corporate transactions in 2018, same-sector M&A accounted for two-thirds of deal volume but more than three-fourths of deal value.

Financial services was an apparent exception to this pursuit of scale, with less deal value than volume within the industry. But that outlier becomes understandable when considering investments by asset and wealth management firms in other industries—including four cross-sector megadeals in 2018—and banks efforts to harness new technology. While only 7% of financial services deals were for tech targets, those transactions captured 14% of the sector’s deal value.

A shift in cross-border deals

Private equity on the rise

With more than 4,000 US deals, private equity acquisition volume in 2018 was at its highest ever, according to Thomson Reuters data. In addition to a 9% increase in volume from the previous year, PE deal value surged 41% to more than "$347 billion—the most since 2014. Helping boost transaction value were 12 announced PE megadeals, double the number in 2017.

PE firms were most active in technology and consumer markets, with deals in those sectors accounting for more than 40% of US deal volume. Sectors drawing the most PE investment by value were tech, media and telecom, real estate and oil and gas.

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More money in IPOs and venture capital

US IPOs continued their rebound in 2018, with volume and value both up from 2017, according to PwC’s US Capital Markets Watch. Even with a slowdown in the fourth quarter—due to volatile equity markets, trade concerns and uncertainty around Brexit—2018 saw more than 200 US IPOs, nearly one-third of them in pharma and life sciences. The combined US IPO value of $54.4 billion was up 24% from 2017, with more than one-third in tech, media and telecom offerings.

In other investment, venture capital funding mirrored M&A trends with more money and fewer deals, according to the latest PwC MoneyTreeTM report. At $99.5 billion, 2018 US VC funding was up 30% and the highest since 2000, while the number of transactions was down 5% to 5,500: the lowest since 2013. A record 53 US VC-backed companies saw their valuations rise to more than $1 billion.

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US buyers drive cross-border acquisitions

Amid trade tensions, growing scrutiny of foreign investment in US companies and other geopolitical issues, cross-border deal volume was mostly flat in 2018. An 11% decline in activity from Q3 to Q4—including an 18% drop in deals for US targets—led to a slight dip in volume for the year compared to 2017, although outbound acquisitions by US buyers were essentially the same. With nearly 3,800 transactions, cross-border deals accounted for more than one-fourth of all M&A, similar to recent years.

By comparison, cross-border deal value rose by 17% last year, powered almost solely by a 34% increase in outbound US deal announcements. While outbound deals were 27% of cross-border deal value in 2016 and 47% in 2017, they were 54% in 2018—the most in a decade. Deals by US companies for non-US-based assets ranged from Comcast-Sky to International Flavors & Fragrances-Frutarom to Coca-Cola-Costa.

Despite somewhat strained political relationships between the US and other nations, deals by and for US companies still span the globe. Canada and the United Kingdom continued to represent the most US cross-border deal flow by far in 2018, followed by Australia, India and Germany. All but Canada saw significantly more acquisitions by US buyers of companies in their countries than inbound US deals, with notable declines in deals for US assets by acquirers in Germany, China and France.

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What’s next for deals

With abundant capital and a healthy appetite for M&A, dealmakers enter 2019 and the New Deal Frontier focusing on where acquisition targets will come from. Start-ups and privately-owned companies remain options, but many would-be buyers continue to watch conglomerates and large corporations as they review their growth strategies and consider selling or spinning off certain businesses.

US divestitures in 2018 posted their lowest volume in five years, but that could change given the current high valuations and the potential returns of a strategic sale to a corporate or PE buyer. Last year showed both groups are willing to make large investments for the right assets. And the capital outlays could become more moderate if a cooling economy starts tamping down valuations.

For more on the current deals landscape and outlook for the coming months, read the latest Deals Industry Insights commentary by John Potter, US Deals Sector Leader.

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Contact us

Bob Saada

US Deals Leader, PwC US

Tel: +1 (646) 818 8043

John Potter

Partner, US Deals Sector Leader, PwC US

Tel: +1 (612) 596 4900

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