It has been an impressive first half of 2018 for US M&A, which delivered its second consecutive six-month increase in value, while volume remained stable. This was achieved despite shrinking inbound M&A activity, rising interest rates and volatile stock markets.

Although economic fundamentals remain sound, headwinds are building. Here we discuss four factors that are likely to shape dealmaking in the coming months.

1: Private equity could get even hotter

Private equity activity is likely to accelerate in the second half of the year. Firms have record amounts of dry powder and are finding innovative ways to deploy it, whether that be through club deals or investing through buy-and-build portfolio company platforms. Strategic buyers have become increasingly efficient and nimble, enabling them to meet vendors' demands and increasing competition in the market.

2: Sector dynamics will fuel megadeals

Megadeals defined the market in a handful of sectors such as healthcare, consumer and TMT, where industries are going through a period of realignment. At the top end of the market, buyers are paying large multiples for high-quality companies in deals where there is a clear strategic rationale, often driven by changing sector dynamics. This is likely to continue in the second half of 2018.

In the mid-market, however, where multiples are also high but strategic benefits may be less clear, it is more difficult to justify paying full price for smaller, slightly risker companies at a time when the macro-economic backdrop is less predictable than in recent years.

3: Tax incentives will continue to encourage M&A

A boost from the cut in headline corporate tax rates and the introduction of reliefs on capital expenditure, along with incentives to repatriate US corporate cash held overseas, will start to be felt as companies report better earnings and higher cash balances. Corporate confidence, an essential ingredient for M&A, will be elevated, and there will be extra capital available for deals.

4: Tech giants face headwinds

Technology companies have been aggressive in recent years, moving into other sectors and buying up younger emerging rivals. The ongoing debate about how tech companies handle private information could change that, particularly if it leads to stiffer regulation. The General Data Protection Regulation (GDPR) has come into effect in Europe and there is increased talk of similar regulations being proposed in the US, even for companies without a European connection.

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