We entered 2017 with a new US presidential administration and plenty of questions about how policy changes would affect deal activity. While the administration’s influence over the economy remains unclear going into 2018, it hasn’t hampered the need of some companies to fuel inorganic growth through deals.
This is merely one disruption that dealmakers are navigating as the new year approaches. Technology has long been disruptive, but never has it been so pervasive, infiltrating virtually all corners of business. Emerging technologies such as artificial intelligence will not only upend how we do business but also change the way we work, particularly as the population ages and traditional ideas of the workforce evolve—all of which could affect how potential acquisitions are evaluated.
Globalization continues to impact US deals as developing countries have emerged as consistent investors in their own right. The Middle East, China, India and other parts of Asia have advanced to become bigger players in deals as economic reforms and other efforts attract foreign investors.
Within this environment, the volume of M&A in the US and across borders was up in 2017. While deal values are down—driven largely by a decline in megadeals—a spate of large-scale takeovers in the works suggests that things may be about to change.
For most of 2017, the M&A picture was mixed: in the US, buyers continued acting on historically low borrowing costs and a strengthening economy. The stock market hit record highs, while at the same time the November unemployment rate remained at its lowest since 2000. As the economy gathered momentum, the market became too expensive for many buyers, who thought twice about making major moves in the face of rising valuations for potential acquisitions.
Abroad, parts of Europe and Asia drove inbound and outbound investment, while the Asia-Pacific led the way in new stock listings. The region surpassed the US to become the dominant IPO region, as many US companies flush with private capital demonstrated little urgency to go public. Of the more than 1,450 IPOs so far this year, roughly two-thirds originated from the Asia-Pacific, helping put 2017 on track to become the busiest year for new listings since 2007.
Recently, M&A values have picked up significantly, with a record dollar amount in deals announced in November. That could herald a comeback for deal values and megadeals—those worth more than $5 billion—in the year ahead.
The long-awaited tax overhaul bill could potentially inject companies with extra capital that would be available for deals, if not returned to shareholders. It also would give investors more clarity in an uncertain regulatory environment. But that sigh of relief may be short-lived, as Washington may turn its attention to trade and antitrust policies.
Riding populist sentiment, the US this year pulled out of one of the biggest global trade deals, the Trans-Pacific Partnership, and is re-evaluating the terms of a more than two-decades-old trade agreement, NAFTA. Nonetheless, companies planning for long-term growth are powering through this uncertain regulatory environment, even if some deals could raise new kinds of antitrust issues.
Whereas the last M&A boom in 2015 largely included deals between direct competitors trying to gain scale and cut costs, the landscape for megadeals in 2018 could look far different. Some companies are trying to remain competitive as new players—particularly tech giants—move into their industries.
The need to adapt has rippled into recent deals that are either under discussion or awaiting approval. Take CVS Health Corp’s roughly $69 billion bid of Aetna Inc., Walt Disney Co.’s interest in 21st Century Fox Inc.’s assets, Broadcom’s $105 billion bid for Qualcomm and AT&T Inc.’s planned purchase of Time Warner Inc. These say a lot about not only the types of deals to come but their scale as “gigadeals.” Many will be watching the government’s response, particularly as AT&T prepares to go to court after the US Justice Department blocked its approximately $85 billion bid for Time Warner.
After the decline in megadeals in 2017, investors are likely to enter 2018 with deal values rebounding. Companies are strategizing to thwart competition from tech giants at a time when activist investors gain unprecedented influence over US business. But as companies scale down and leverage growing markets, tech firms are steps ahead, pouring investments into AI and other emerging technologies amid a cash-rich US economy.
The availability of capital has been fueled by near-record private equity fundraising, historically low interest rates and the potential that US lawmakers could repatriate overseas cash back to the US through legislation now being discussed in Congress. And Europe and China also are poised to drive deals, as ongoing economic reforms improve the prospects of investment in these regions.
Companies and investors will need to continue adapting to these influences. An abundance of capital alone may not conquer high valuations, especially amid evolving technology, shifting demographics, political uncertainty and other disruptors. Acquisitions, alliances and other transactions will happen, but success comes not in making a deal, but making the right deal.
Deals Leader, PwC US
Deals Solutions Leader, PwC US