The deal activity is at its highest since 2007, and it may have just begun.
More divestments, a shift towards investing in disruptive technologies and return of private equity investors will drive mergers and acquisitions, according to Deloitte. “Many corporates will spend cash assertively to beat incoming economic and disruptive challenges,” Ian Macmillan, global managing partner for M&A services at Deloitte, wrote in a report. “For others, the changing supply of liquidity and debt will rattle nerves and provoke hesitancy.”
The flurry to spend is already underway. Deal activity in the first four months of 2018 has been the highest since 2007 at $1.7 trillion. That was largely due to mega deals of $1 billion or more, that contributed nearly a third to the total deal value.
“Crossing the $927 billion mark in the first quarter is unprecendented, and it shows the appetite of businesses to acquire in order to stay ahead of competitors and capture innovations,” the report said. “Growth is back on the table, at least for the moment.”
There is uncertainty about whether this “new wave of mega deals” can sustain. Macmillan said there is an urgency to spend now as we move towards the end of low interest rates and the liquidity-boosting quantitative easing cycle. “Significant questions remain as to how the unwinding of QE will affect lending and business activity as a whole.”
Here's how Deloitte sees deal activity changing in the near future:
Shareholder Activism Driving Divestments
Divestments have played a major role in driving M&A activity since 2014. And that trend will continue as 70 percent of the businesses surveyed by Deloitte expect to make at least one divestment in the next two years.
What’s interesting is that divestments are expected to rise due to activist shareholders whose influence has been growing at companies. Deloitte’s survey found that some 37 percent of activist shareholders seek M&A or divestments. “We are expecting divestments among some large French, Brazilian, and Australian corporates, German automotive firms, and British consumer goods companies, as well as across U.S. financial, telecoms and media companies.”
Non-Tech Sector, Meet Technology
Words like fintech, artificial intelligence, robotics and cyber security are in vogue. And that's where a lot of the deal activity will take place.
Firms, even in the non-tech sectors, will invest heavily towards disruptive technologies as they look to quickly adapt to the changing global environment, Deloitte said.
“The dizzying pace of technological innovation has unleashed a fundamental shift in M&A, nearly 60 percent of disruptive technology acquisitions were done by the non-tech sector,” the report said. Such deals have driven a spend of about $634 billion between 2015 and 2017.
While technology companies often lead the way, many other sectors, such as consumer businesses, telecoms, financial services and the service sector, have also become active deal-makers.Deloitte
Private Equity ‘Dry Powder’
Private equity money has slowly and cautiously come back to the market. In 2017, the value of deals driven by such investors was at its highest since the 2008-09 financial crisis. In 2018, deal values in the first quarter jumped 24 percent. That too will continue.
“With PE houses holding an estimated nearly $1 trillion worth of unallocated capital, managers will need to more rapidly invest their substantial funds in valuable deals, while simultaneously taking responsibility for conducting due diligence,” the report noted. Given the scale of “dry powder”, the competition for the right assets will only stiffen.
Tide Shifts To U.S. Firms; China Takes Backseat
The U.S. did a major tax overhaul last year, cutting the corporate tax rate to 21 percent from 35 percent. According to Deloitte's survey, that will have substantial impact on the M&A strategies of the country's firms.
The tax cut is also applied on overseas earnings that are brought back to the country. The incentive to repatriate cash to the U.S. is an obvious driver of the tax reform, Deloitte noted. “This is likely to raise significant amounts of money within America - given that its rated non-financial corporations hold around $1.4 trillion of their total cash and liquid investments offshore—and therefore may tip the balance in favour of more U.S. domestic acquisitions.”
Deal corridors in and out of China are changing “dramatically” too. Outbound investments from the second-largest economy in the world have seen a 40 percent fall last year, down to $119 billion, according to Deloitte. The trend is also worsening, with outbound investments down 54 percent in the first quarter.
The reason? Regulatory pressure from Chinese authorities and from the countries in which their firms are buying assets. “As a result, we expect a proliferation of smaller deals involving Chinese M&A outside China,” Deloitte said. “These smaller deals could be followed up by much larger acquisitions in sectors favoured by authorities.”