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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

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

Insight
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3 min read

There were 19 real estate M&A transactions collectively worth US$24.8 billion during the first half of 2019, representing a 24 percent fall in deal volume and a 53 percent decline in value compared to the same period of 2018.

The comparison is skewed somewhat given that the first quarter of 2018 recorded the highest total quarterly M&A deal value in real estate since 2009. Nevertheless, the sector has experienced a significant slowdown so far this year.

This is a consequence of challenging sentiment in the retail sector, where bricks-and-mortar stores continue to suffer at the hands of online competitors. It also partly reflects the broader anxiety around asset prices seen at the end of 2018 and in early 2019, given stock market setbacks in December. The subsequent recovery in the stock market then led to a modest quarter-on-quarter rise in real estate deal values, from US$8.7 billion in Q1 to US$16.2 billion in Q2.

Nevertheless, there are reasons to remain optimistic about real estate M&A. The desire for income-producing investments in a low-interest-rate environment remains strong, setting the tone in an asset class that has become increasingly important for institutional investors. Net asset values are trading at close to stock prices in most sub-sectors of the market—the exception being retail—but not at premiums, providing a supportive backdrop for acquisitions.

It is also the case that some sectors of the market have held up much more strongly than was previously expected. Park Hotels' purchase of Chesapeake Lodging Trust, the third-biggest real estate deal of the year so far, comes at a time when hotels continue to post high occupancy rates.

Elsewhere, industrial real estate remains highly attractive, with the e-commerce sector struggling to secure the warehousing and distribution infrastructure it requires to support its pace of expansion. Blackstone’s US$18.7 billion acquisition of the US assets of GLP is a good example of a deal driven by this theme.  

Meanwhile, REITs offer exposure to a physical asset class in the event there is a flight to safety among investors concerned about recession. And the dry powder held by private equity offers further support for real estate M&A, providing ready buyers for distressed assets, in particular, and smoothing out volatility in the cycle.

Top real estate deals
H1 2019

1: Blackstone Group L.P. bought GLP Pte. Ltd (US Logistics Assets) for US$18.7 billion

2: Ivanhoé Cambridge bought IDI Logistics for US$3.5 billion

3: Park Hotels & Resorts bought Chesapeake Lodging Trust for US$2.6 billion

 

 

 

 

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© 2019 White & Case LLP

 

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