Our thinking

Navigating change: US M&A H1 2018

What's inside

Clouds are forming on the horizon, however appetites for big-ticket deals have not yet diminished

US M&A defies market uncertainty

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

 

Navigating change: H1 in review

First-half activity remains on par with 2016, as strong fundamentals continue to drive M&A

New York City buildings

PE hits new post-crisis high

Despite intensifying competition within the market, US private equity activity is yet to show signs of a downturn

aerial photography of Empire State Building in New York

Sector watch

Energy, mining & utilities leads the field

Bulky oil & gas deals pushed energy, mining & utilities close to the top spot in H1, while digital disruption ensured a steady flow of tech deals

large metal pipes

Technology M&A gets white hot in 2018

Dealmakers across all industries are looking to secure US tech assets in order to keep up with the technological changes disrupting their industries

urban area at night

Consumer firms adapt to survive

Despite a drop in headline figures, M&A within the US consumer sector remains an important method to secure long-term growth

root vegetables

Oil & gas M&A gains cautious ground

A steadying oil price signals a brighter future for oil & gas M&A, yet market caution remains

oil pipelines

Big-ticket deals drive pharma M&A

Activity in the sector is fueled by the need to refill product pipelines and navigate convergence between health and tech firms

medicines

Industrials & chemicals M&A gathers pace

Corporate repositioning and tax reform are two key trends driving M&A in the sector

welding

Is blockchain M&A poised to accelerate?

US dealmakers are learning to navigate the complex world of blockchain M&A, but they will have to proceed with care in heavily regulated sectors

building windows

In focus: Financial services regulation

An overview of the financial regulatory landscape and key trends to watch

US dollar

Decision time for M&A in Delaware

Noteworthy rulings out of the Delaware Supreme Court and the Court of Chancery in the past six months are already having consequences for M&A activity

pedestrian streets

Spotlight on public companies: Cybersecurity and governance

The number and severity of cybersecurity incidents at major companies has increased, causing regulators to take a tougher approach. We look at five practical steps companies can take to manage these risks

computer programming

Conclusion

Key trends to watch in the months ahead

Acquirers shrugged off macro-economic uncertainty in the first half of the year to secure deals of strategic necessity

New York City buildings

Meet our partners

Global M&A leaders

John Reiss

 

John Reiss
Partner, New York

 

Gregory Pryor

 

Gregory Pryor
Partner, New York

 

 Dr. Jörg Kraffel

Dr. Jörg Kraffel
Partner, Berlin

 

Christopher Kelly

 

Christopher Kelly
Partner, Hong Kong

 

Allan Taylor

 

Allan Taylor
Partner, London

 

 Barrye Wall

 

Barrye Wall
Partner, Singapore

 

John Cunningham

John Cunningham
Partner, London

 

Alexandre Ippolito

Alexandre Ippolito
Partner, Paris

 

PE hits new post-crisis high

Despite intensifying competition within the market, US private equity activity is yet to show signs of a downturn

Insight
|
5 min read

US private equity (PE) had its busiest 12 months since the financial crisis in 2017, securing 1,261 buyouts valued at US$191.9 billion over the year—a record deal volume. A total of 633 buyouts valued at US$111.9 billion have been announced so far this year, marking a 4 percent uptick in value compared to the same period in 2017, while volume edged ahead by 3 percent.

 

In industries that are not consolidated, firms employing a buy-and-build strategy are able to pick up smaller businesses for lower multiples.

Competition reaches boiling point

Growing competition within the PE asset class is increasing pressure on buyout firms looking to deploy their cash. According to Preqin figures, PE firms raised a record US$453 billion in 2017 and are sitting on US$1 trillion of dry powder—an all-time high. With so much capital seeking assets, pricing has skyrocketed, prompting some firms to step back from transactions for fear of overpaying.

Extremely high prices are making it increasingly difficult for buyout firms to match sellers' expectations. Strategic buyers are also back in full force. Their new willingness to accept risk and openness to problem-solving makes them formidable competitors to PE sponsors in the auction process, with a leg up on valuations most of the time due to their ability to harvest synergies.

 

 

    
    

4%

Increase in buyout deal value compared to H1 2017

Changing tactics

As competition for assets heats up, PE firms have evolved their investment strategies and tactics, finding new and inventive ways of putting their money to work. Buy-and-build strategies, where PE firms back platform companies to pursue consolidation strategies in chosen sectors, are becoming more popular. JAB Holdings, the owner of coffee group Keurig Green Mountain, for example, is supporting the company's US$23.1 billion ongoing acquisition of soft drinks company Dr Pepper Snapple Group.

In industries that are not consolidated, firms employing a buy-and-build strategy are able to pick up smaller businesses for lower multiples than what they themselves are trading at. Buy-and-build strategies can also work in less-fractured markets, because once the PE firm has a platform, it can achieve the same synergies as a purebred strategic and be competitive on price.

Club deals are also becoming a more common way to manage high prices, as demonstrated by Blackstone, GIC and CPPIB joining forces to acquire a stake in Thomson Reuters Corporation in a planned US$17 billion deal. As mentioned, PE funds are under increasing pressure to stretch to pay higher multiples and higher overall purchase prices. Funds that are uncomfortable writing the full equity checks themselves are teaming up with other partners, who are often limited partners in their funds.

 

    
    

US$111.9 billion

The value of 633 buyout deals in H1 2018

Full steam ahead

At the beginning of the year, activity was a little slower as dealmakers assessed potential impacts from tax law changes. There was also uncertainty surrounding the direction of the Trump administration. On top of this, after very high activity last year, many funds were focused on portfolio company-level integration.

Yet despite the slight hesitancy seen at the start of the year, funds will continue to put their money to work. While there has been some trepidation surrounding a downturn in the market, it appears, for now, that the bull run looks set to continue for US PE.

 

 

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2018 White & Case LLP

 

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