Navigating change: H1 in review
First-half activity remains on par with 2016, as strong fundamentals continue to drive M&A
An impressive first half of the year for US dealmaking reflects M&A's enduring value in an uncertain market
After a very strong 2017—when M&A in the US reached its third-highest overall deal value since the financial crisis—deal value grew again in the first half of 2018. Compared to H1 2017, value rose 30.5 percent to US$794.8 billion when compared to the same period in 2017, while deal volumes held steady.
Activity has been brisk despite increasing macro-economic headwinds. The Federal Reserve recently raised interest rates and signaled its intention to do so again twice more before the year is out. Threats of a bourgeoning global trade war are intensifying after the imposition of tariffs by the US and other large economies. And the US stock market has experienced significantly higher volatility this year than it did last.
One could reasonably expect that M&A would cool against this backdrop, but the fact that it has not suggests that deals are going ahead for essential strategic reasons rather than opportunistic ones.
Technology and its disruptive impact across all sectors is one of the main factors that has made M&A a necessity. The impact has been most apparent in sectors such as retail and healthcare, where digital platforms are ideally placed to disrupt established service and distribution channels. No sector has been untouched, however. Unless non-tech companies have the resources in-house to write their own software and algorithms—and most do not—M&A may be the best option to keep pace with dynamic change.
We expect the second half of the year to be busy, but no one can afford to ignore the threats posed by rising interest rates, increasing protectionism, an incipient trade war that could increase tariffs, a potentially inverting yield curve, unsustainable pricing demands and a volatile stock market. Companies will need to navigate these dynamics if M&A's bull run is to continue.
John Reiss
Global Head of M&A
White & Case
Gregory Pryor
Head of Americas M&A
White & Case
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Acquirers shrugged off macro-economic uncertainty in the first half of the year to secure deals of strategic necessity
Acquirers shrugged off macro-economic uncertainty in the first half of the year to secure deals of strategic necessity
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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.
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.
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.
Although economic fundamentals remain sound, headwinds are building.
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.
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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