Despite a fall in overall global dealmaking, M&A in the US has proved resilient, as megadeals and domestic activity boost the market
It has been a busy year for M&A involving US companies. While global deal value dropped compared to 2018, the US maintained its year-on-year total and took a greater share of the overall deal market.
Confidence in the US economy and the opportunities it offers companies for growth and investment led to a market driven by megadeals (valued at US$5 billion or more), with the life sciences and TMT sectors leading the way. Indeed, a full 58 percent of the US$1.5 trillion worth of deals involving US companies qualified as megadeals, up from 47 percent in 2018. And nine of the top ten deals for 2019 were domestic, suggesting that US corporate executives see plenty of opportunity in their home market.
Last year was also characterized by a growing breadth of M&A market participants. Private equity (PE) remained active, buoyed by strong fundraising and high liquidity in the debt markets. Family offices continued their expansion into direct deals. And sovereign wealth funds, many of which had pulled back from direct investing, returned to M&A markets, with the US as a target.
Rising stock markets and competition for deals led to further increases in company valuations in both public and, in particular, private markets. Many corporates opted for deals involving stock consideration to mitigate high pricing, while PE players sought smaller platforms through which to execute buy-and -build strategies as well as hunting opportunity in taking public companies private. These trends suggest that dealmakers are proceeding with confidence but also caution when it comes to pricing.
Talk of a downturn has been muted somewhat as we head into 2020—at least regarding the first half of the year. Economic growth will settle at 2.1 percent, according to the Conference Board. Unemployment is predicted to remain low, and financing for deals will continue to be widely available and low cost. However, with a presidential election in November, as well as ongoing headwinds such as trade wars and unrest in the Middle East, there is no room for complacency.
US dealmakers steer a steady path through global headwinds
As the rest of the world backed away from the deal table, confident US corporates continued buying businesses—especially in the life sciences and TMT sectors, and particularly in the domestic market.
In line with the wider US M&A markets, PE deals held firm through 2019 with 1,329 buyouts, worth US$208 billion, representing a decline of 9 percent by volume, but just a 4 percent fall by value relative to 2018.
Sector overview: Tech and healthcare take the top spots
In terms of value, the technology and healthcare sectors—separately and, sometimes, in tandem—have ruled the M&A markets in 2019. Meanwhile, the consumer industry faced tough times—though there could be a rebound in 2020.
SaaS, cashless and convergence drive tech to the top
Technology continued to be among the most active subsectors for US M&A in 2019, with 1,138 deals announced worth a total of US$206 billion. This represents a marginal decrease of 3 percent in volume and 7 percent in value compared to 2018 activity.
The trend for megadeals in US real estate continued in 2019, with 38 transactions in the sector, worth a total US$56.6 billion—but overall deal volume was down 17 percent and deal value fell 25 percent year-on-year.
The healthcare sector (incorporating pharma, medical and biotech) has seen M&A valued at US$256.5 billion across 645 deals in 2019. This is a decrease of 9 percent by volume, but an increase of 121 percent by value.
As we enter a new decade, the signs are that we can look forward to another year of steady US M&A activity. We anticipate the following five trends will emerge to move the market through the year:
1. Economic strength drives deals in H1
Despite challenges such as the US-China trade situation and Middle East tensions, the US economy is forecast to remain strong throughout the year—at a 2.1 percent growth rate, according to the Conference Board. Meanwhile, unemployment is at a 50-year low and consumer confidence is predicted to rise in 2020. In addition, financing for deals is low-cost and widely available, the rise of activist investors has focused boardrooms on portfolio optimization and PE firms have unprecedented levels of dry powder to deploy. The conditions are right for early-year dealmaking, especially ahead of the run-up to the presidential elections in November.
2. Further disruption
Advances in the application of artificial intelligence, machine learning and the rollout of 5G will result in yet more disruption of business models across diverse sectors. This is set to unleash further M&A activity, as incumbents seek to reposition themselves, upgrade their infrastructure, improve productivity and fend off competition from, in some spaces, the technology giants, which are themselves pursuing aggressive acquisition strategies.
3. A rebound in oil & gas M&A
While 2019 was a slow year for deals in the sector, 2020 should be more active (assuming Middle East tensions don’t derail current trends). After a year in which oil prices bumped around the middling range, seller valuation expectations should now be more in line with what buyers are prepared to pay, which should help unblock the pipeline. In addition, debt maturities among restructured companies in the sector are looming, which will bring more deals onto the market through the year.
4. Greater emphasis on national security
With the full force of FIRRMA set to become a reality from February 2020, increased resources at CFIUS and rising scrutiny from US and overseas authorities, more preparation ahead of cross-border deals will become the norm. Buyers and sellers will need to think ahead about the involvement of overseas parties in their transactions and the extent to which dealmaking could be viewed as posing national security issues.
5. An increase in distressed opportunities
These will be caused by a variety of factors, including over-leverage; structural change in certain sectors; obsolescence where companies have been unable to reposition in the face of technological disruption; or even the start of the turning of the cycle after several years of benign economic conditions. Whatever the cause, however, the US market is well served with investors and turnaround specialists with the skill and capital to enable them to capitalize on distressed opportunities.