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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

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

Insight
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3 min read

Buyout activity fell 14 percent compared to the first half of 2018, with values totaling US$111.1 billion during the first six months of 2019, while volume fell 19 percent to 608 deals. On the other hand, exit activity fared far better, rising 19 percent in deal value to US$148 billion, though volume fell 15 percent to 505 deals.

Whether the first-half slowdown in private equity buyouts represents the start of a sustained decline in activity or a mere pause for thought remains to be seen. Buyout activity remains high when assessed in a historical context. But the industry may be taking a wait-and-see approach given the possibility of a slowdown in the US economy. The question is how long they can wait—with US$2.4 trillion in dry powder globally, firms are under significant pressure to get deals done.

The availability of capital has pushed competition and valuations to exceptional heights, with multiples averaging about 11 times' EBITDA in the US and Europe over the past 12 months, above the level seen prior to the financial crisis. Thus, some firms are biding their time, particularly in industries where strategic buyers—able to issue stock to finance high purchase prices and to justify elevated valuations with synergy estimates—are particularly active.

Against this backdrop, activity has skewed toward larger deals in the first half of the year. In the buyout category, the two largest deals of the year so far, Zayo Group’s US$14.1 billion acquisition by Digital Colony Partners and EQT, and Ultimate Software's US$11.8 billion acquisition by a Hellman & Friedman and Blackstone consortium, together accounted for nearly a quarter of total deal value. In the exit category, KKR's sale of payments infrastructure provider First Data to Fiserv for US$38.4 billion accounted for more than a quarter of deal value.

For some firms, the answer has been to try new approaches. The fact that the two largest deals of the year so far were take-private transactions reflects the fact that, with multiples so high among private companies, valuations of publicly listed companies, even at a premium, look more affordable. Alternatively, a growing number of private equity firms are investigating cross-border transactions, seeking out investments in Europe, as well as other jurisdictions, where competition is not so fierce.

Higher multiples have also seen the return of club deals, with buyers pooling resources to access mega-transactions. Such arrangements bring their own challenges—most obviously over who will have strategic control of the business and exit timing—but these look less daunting in a highly valued marketplace. In addition, "new" club deals are also emerging, in which large-cap funds bring in one or two of their largest LPs to underwrite between 25 percent and 40 percent of the equity check. In terms of control, the LP will have minority rights but the large-cap fund will be in charge. 

On the exit side, while sales were slower in the first half, heightened expectations of a recession should lead to an increase in activity, as funds seek to sell out of holdings vulnerable to a downturn. We are already beginning to see average holding periods come down in length to approximately four and a half years—and a corollary increase in “quick-flip” exits after fewer than three years.

 

 

 

 

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© 2019 White & Case LLP

 

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