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M&A Dealmakers Are Getting Spooked by Global Tensions

(Bloomberg) -- A record wave of mergers and acquisitions could slow sharply as dealmakers get spooked by rising geopolitical concerns, according to a survey by Ernst & Young LLP.

Corporate takeover appetite is at a four-year low with only 46 percent of executives planning to make purchases in the next 12 months, according to a survey of more than 2,600 dealmakers across 45 countries by the New York-based consultancy. That’s reduced from 56 percent of executives polled last year.

"Geopolitical, trade and tariff uncertainties have finally caused some dealmakers to hit the pause button," Steve Krouskos, EY’s global vice chair of transaction advisory services, said in the report. "Despite stronger-than-anticipated first-half earnings and the undeniable strategic imperative for deals, we can expect this year to finish with much weaker M&A than how it started."

The slowdown is likely to be only temporary and the strategic rationale for acquisitions still remains strong, with EY forecasting that activity will pick up in the second half of 2019. The majority of those polled hold the view that global economic prospects are getting better.

M&A Slowdown

The consultancy is among an increasing number of institutions warning that M&A activity could be slowing. Large cross-border deals, which fueled a boom in activity in the past five years, is likely to slow due to the impact of trade wars and regulation, JPMorgan Chase & Co. said in September.

Companies announced about $3 trillion of transactions in the first nine months, according to data compiled by Bloomberg, putting 2018 on track to potentially beat the $4.1 trillion total set in 2007 unless there’s a sharp slowdown in the fourth quarter.

Companies are taking more time to review their portfolios amid the uncertainty and are likely to divest more assets going forward, according to the survey. This is likely to bode well for private equity activity, with about 31 percent of participants expecting buyout firms to be major acquirers in 2019.

"The rise of private capital, including private equity, super funds, sovereign wealth funds and corporate venture capital, has fundamentally reshaped the funding environment and will help refresh M&A activity in the future," Krouskos said.

The outcome of Brexit negotiations is a key concern for executives participating in the survey, the consultancy said. About 41 percent of the executives said they would prefer to see an economic free trade agreement similar to Switzerland’s between the U.K. and the European Union when they separate.

Despite the uncertainties surrounding Brexit, the U.K. was the No. 2 choice for the polled executives in terms of M&A transactions, up from fifth in an April survey.

Confidence among corporate clients remains high, though executives are starting to think about Brexit, trade wars and the outlook for next year, Andrew Pinder, head of U.K. investment banking at Investec Bank Plc, said in a Bloomberg Television interview with Ruth David and Anna Edwards.

©2018 Bloomberg L.P.