Although recruiting season is coming to a close, for those still going through interviews or anyone who just wants to brush up on the current state of the industry, I thought I'd post/summarize this piece from JPM about some of the key trends in the M&A market in 2017 as year-end approaches. This document is forward-looking, so I've tried to sanity-check with what has actually been happening this year. Happy to hear your thoughts on this and hope it's useful for some of you. Enjoy, nerds.
(I take no credit or part in the views expressed by JPMorgan in this piece and am solely reposting for the benefit of WSO members - source document attached)
Active markets continue their roll
Low costs of funding (lowest median WACC since 2004) and only slight increases in the organic growth of most firms continue to encourage deal activity. 2016 M&A volumes were over US $3.9tn, with an increasing level of deals completed with cash (62% versus 54%). Technology, power, real estate and healthcare were the leading sectors, which is anticipated to continue - and has continued - through 2017.
2017 has seen an increasing portion of deals completed with stock in line with rising equity valuations, which increases the risk of companies overpaying for assets. However, shareholders continue to reward companies for engaging in dealmaking. As JPMorgan writes, "In fact, 20% of all announced transactions with a value in excess of $500 million resulted in a positive share price five-day reaction of at least 5%."
Massive amounts of undeployed private equity "dry powder" (US $822bn as of 31 Dec 2016) will increase competition for deals and drive activity as funds are pressured to make use of their available capital.
Rules and uncertainty
- Pro-business reforms in the US such as corporate tax reform and cash repatriation policies may provide good opportunities, assuming these changes go through
- Elections across multiple regions may prompt companies to be more cautious regarding acquisitions and political risks
- Increased Chinese government scrutiny and regulations for deal review may lower volumes for inbound and outbound Chinese M&A
- Regulatory uncertainty has resulted in 2016 having the largest total of withdrawn deals since 2008, with this trend continuing into 2017 (AT&T/TWC, BAYN/MON)
Deals with passports
Cross-border M&A will continue to remain a large part of an increasingly globalised M&A market
- Brexit will likely create opportunities for cross border M&A, with cross-border deals representing on average 70% of UK deals and the continued GBP weakening
- Outbound Chinese M&A interest has exploded from 2015 to 2016 (471% YoY growth in US, 252% YoY for EMEA), although this trend may begin to reverse in 2017 as China grows focus on its Belt & Road Initiative to drive regional investment. The Chinese government has also stepped up its regulatory scrutiny of both inbound and outbound M&A even as it continues to open up local markets. Any outbound Chinese M&A activity will likely be strategically focused acquisitions
- Japan is expected to see an increase in outbound M&A as the Japanese market regains its footing and companies look elsewhere for growth
- Large, institutional investors are playing an increasing role in activism and pressuring executives to consult with shareholders and negotiate harder before settling with minority activist stakeholders, and they themselves are engaging in activist tactics to grow shareholder value
- Shareholder activism levels continue to grow internationally after years of continued US dominance in launching activist campaigns
Agree? Disagree? Why? What have you seen this year? What do you expect for 2018?