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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

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

Insight
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4 min read

There were just 54 deals in the retail sector during the first half of 2019, compared to 84 transactions that took place during the same period of 2018. Deal values fell even further than volume, down 43 percent to US$9 billion.

The industry continues to see a shake-out as spending migrates from physical stores to online, taking its toll on traditional chains that have not been able to embrace digital transformation with sufficient speed. Already in the first four months of this year, retailers announced that 5,994 stores would close in the US, more than the number of stores closed in all of 2018, according to retail industry research firm Coresight Research.

This disruption is now having an impact on M&A. The largest deal in the first half by some margin, ESL Investment’s purchase of Sears out of bankruptcy, followed the collapse of the iconic retailer in the face of tough competition, including from online rivals. Further activity around distressed assets is likely in the second half of the year and beyond.

The rise of e-commerce is also driving a different kind of deal, as leading players target new markets, or team up with bricks-and-mortar chains.

Amazon's purchase of Whole Foods two years ago continues to be closely monitored as the online retailer is reportedly striving to prove its Prime customer base is the right market for its new subsidiary, while also apparently contemplating price cuts to drive sales increases.

Similarly, Walmart's purchase of a majority stake in Flipkart last year is an example of a leading bricks-and-mortar retailer diving into both e-commerce and overseas markets. India’s largest online retailer also offers an invaluable source of expertise on technological innovation, particularly in artificial intelligence. If Walmart can make a success of the deal, competitors may want to pursue similar transactions.

On valuations, retail businesses have continued to attract premium prices, both from strategic buyers and private equity firms, which have often taken on significant debt to fund transactions.

That leaves little room for error in the successful execution of the value plan for these deals—and could leave buyers vulnerable in the event that any significant downturn in the US economy affects the sector, especially where significant leverage is employed. 

However, for now at least, the backdrop for the sector remains strong, with an economic environment that is generally supportive of consumer spending (which grew 3.2 percent year-on-year as of May 2019, according to the National Retail Federation, a trade association).

Top retail deals
H1 2019

1: Sears bought ESL Investments, Inc. for US$5.2 billion

2: Cura Partners bought Curaleaf for US$1.1 billion

3: Apollo Management bought Smart & Final Stores for US$1.1 billion

 

 

 

 

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© 2019 White & Case LLP

 

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