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Defying gravity: US M&A H1 2019

What's inside

A rise in US mega-transactions more than made up for a drop in volume in the first half of 2019

Foreword

After a drop in activity in the second half of 2018, US M&A has recovered strongly in the first two quarters of 2019, demonstrating the appeal of dealmaking—despite uncertainty.

In spite of several quarters of growing uncertainty about macroeconomic headwinds, US M&A deal value grew again in the first half of 2019. Overall value for the first six months of the year was up 9 percent compared to the same period in 2018. And US deal value took up a larger share of global M&A, making up 53 percent of total global deal value, up from 41 percent in H1 2018. US deal volume, on the other hand, was down 21 percent compared to 2018, a record year for deal volume.

This is good news, particularly since global activity declined on both value and volume measures this year. But the future seems more uncertain today than it has in some time, particularly since there are strong reasons for both caution and optimism.

There are some signals warning that we are due for an economic correction, despite a US economy that remains healthy. US Federal Reserve Chairman, Jerome Powell, recently hinted at rate cuts, highlighting that uncertainty over trade policy and weakening global growth continue to have negative implications. Trade troubles persist, particularly with China. An inverted yield curve suggests that the market expects a downturn on the horizon. And, after a lengthy period of frenzied dealmaking, valuations are high.

Yet the US economic backdrop remains favorable, at least for now. Capital markets are at record levels and there is plenty of financing available for companies who need it to fund dealmaking. Private equity firms continue to amass capital to deploy.

Though deal volume has dropped for three quarters in a row, viewed in the longer-term context, activity remains robust.

Whether the second half of the year can sustain the same level of activity as H1 remains to be seen. The year-on-year growth in M&A value suggests that dealmakers still have appetite, as well as the capacity, to execute deals if the strategic rationale makes sense.

A break in the clouds: M&A in the first half of 2019

The US M&A market delivered a surprisingly robust first half, with total value rising 9 percent year-on-year. Volume, on the other hand, dipped 21 percent

Private equity slows in 2019 as valuations continue to rise

Despite accumulating a vast, historic pile of capital for acquisitions, private equity has moderated its pace of buyouts in the first half of the year

Sector watch

Sector overview: Pharma and TMT lead the pack

The pharmaceutical, medical and biotech sector was number one by value, followed by technology, media and telecoms (TMT). TMT led by volume, followed by industrial and chemicals.

Pharma chases innovation through deals

The need to replenish intellectual property has pushed the pharma industry to the highest-performing sector by M&A value

Technology dealmaking stays buoyant

H1 2019 has seen deal value continue to climb in technology M&A, as digital disruption overtakes segments of the market such as fintech and Big Data

Retail M&A falls as sector migrates online

M&A activity in the retail sector fell sharply during the first half of 2019, as uncertainty and digital disruption continue to put pressure on the sector

Megadeals drive oil & gas M&A

Concerns about the price of oil have left the industry reluctant to strike deals, bringing down volume and value in H1

Real estate M&A drops, but hopes are higher for H2

After a standout 2018, real estate M&A has dropped significantly in the first half of 2019, but segments of the market such as logistics and hotels have remained attractive

In Focus

Three key M&A decisions from Delaware courts

The first half of 2019 saw several decisions from the Delaware courts that will affect M&A dealmaking

SEC proposal would ease burden of certain financial disclosures on public companies

Proposed revisions to current financial statement disclosure requirements for business acquisitions and dispositions would simplify compliance while ensuring investors get the information they need

Conclusion

Can the good times last? Four factors shaping M&A in the second half of 2019

Many of the factors that have underpinned recent M&A activity remain in place, but concerns are mounting

Can the good times last? Four factors shaping M&A in the second half of 2019

Many of the factors that have underpinned recent M&A activity remain in place, but concerns are mounting

Insight
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3 min read

Positive drivers of M&A, including the strength of the US economy, the availability of financing and the strategic imperative to consolidate or transform for many corporates have underpinned transactions.

However, concerns about the possibility of an economic slowdown, the US's deteriorating relations with China, and elevated valuations could, moving forward, all prove to be restraining forces on M&A.

Will the pace of M&A continue during the second half of 2019 and beyond? The answer will depend on a multiplicity of factors, but four are particularly significant.

 

1. Can the US defy the economic pessimists?

The yield curve for 10-year US Treasury bonds has been inverted for much of this year, meaning that investors expect lower interest rates in the future than today. In the last 60 years, an inversion of this kind has been followed by a recession in every case, except one.

A recession would clearly be difficult for the M&A market, dampening the enthusiasm of buyers and prompting a rush to exit among private equity firms, particularly those that bought at elevated valuations. The extent to which the US is able to dodge  what the bond market appears to see as an almost inevitable downturn will therefore be crucial—though a recession could also create opportunities.

 

2. Will the Trump administration step back from trade wars?

President Trump's ongoing approach to trade negotiations with the Chinese—and the possibility of escalation in trade tensions with Mexico—are unnerving the M&A market. Without reassurance that solutions can be found to these disputes, strategic acquirers in the US will be reluctant to commit to transactions, whether domestic or cross-border. Inbound M&A will also suffer, as buyers of US assets fear increased scrutiny.

Any suggestion, meanwhile, that the President is prepared to take a step back from a protectionist agenda—and to do a deal with China—would give the M&A market the certainty that it craves, providing a boost to activity.

 

3. Will shareholders sanction more megadeals?

Deal volumes fell despite the rise in deal value, with megadeals in sectors such as healthcare and technology seemingly immune to the anxiety seen elsewhere in the M&A market. However, even these deals were given a much more hostile reception by shareholders than similar transactions a year ago. CEOs are finding it increasingly difficult to persuade the markets to back their acquisition strategies.

Shareholder skepticism about deals may persist or increase if anxiety about recession and protectionism continues. 

Executives will become more reluctant to pursue deals in the knowledge that they may face a battle to secure the backing of their investors.

 

4. Can private equity find a way to invest record amounts of dry powder?

The record financial firepower that private equity firms currently have at their disposal could underpin a recovery in M&A activity—but only if firms can be persuaded to put this dry powder to work. While valuations remain at current elevated levels, the private equity sector will resist the pressure to spend its cash, particularly if the chance of a recession increases.

There will be new opportunities—expect to see more club deals and international acquisitions, for example—but having raised record funds, the private equity sector is wary of disappointing its investors.

 

 

 

 

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2019 White & Case LLP

 

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