HEADLINES

• Three-quarters of respondents say a reduction in federal corporation tax will increase their appetite for M&A
• Almost half (46 percent) say that reduced tax on all non-US earnings brought back into the country will increase their appetite for deals
• 70 percent of survey respondents say that during the last 24 months, their company had announced a deal that subsequently lapsed before completion
• Just over half of the participants (51 percent) estimate that M&A improved their underlying earnings per share (EPS) by between 3 and 4 percent
• A quarter of respondents identify the acquisition of IP/technology as the main strategic rationale for deals in the year ahead

In H2 2017, White & Case, in partnership with Mergermarket, surveyed 200 senior-level executives about their experiences and outlook on M&A in the US. The aim of the survey was to analyze dealmaker sentiment within the industry and pinpoint issues and challenges at the forefront of dealmakers' minds in 2018. The key findings from our survey, below, are an almost equal mix of the encouraging, the not-so-encouraging and the unknown.

Deal drivers

1. Tax cuts set to boost M&A

The "Tax Cuts and Jobs Act" passed through both the Senate and the House in December 2017. The bill, which cuts the corporate tax rate from 35 percent to 21 percent and lowers tax on repatriation of overseas cash, has been well received by US businesses and looks supportive of M&A activity.

The proposed tax cut was identified as a key area to watch in our survey, with dealmakers optimistic about the final outcome of Trump's reforms. Three-quarters of those polled say a significant reduction in federal corporation tax would increase their appetite for M&A.

2. Tax incentives to repatriate earnings set to drive M&A

Proposals encouraging companies to repatriate offshore earnings back into the US were also well received by survey respondents. Almost half say that the introduction of provisions, such as those in the new tax law, would increase their company's appetite for deals. Such incentives would result in significant tax savings, which can be further utilized for expansion and returning cash to shareholders.                                   

3. Technology is a major strategic deal driver

For companies that are planning to undertake M&A during the next 12 months, the acquisition of IP and/or technology is expected to be a key driver, with a quarter of respondents identifying this as the main strategic rationale for deals in the year ahead.

As a result of the rapid advances in technological innovation seen in recent years, dealmakers are on the hunt for bolt-on acquisitions that will enable them to stay ahead in a rapidly evolving business climate.

The attractiveness of IP/ technology assets is not limited to one sector, and convergence between industries remains an important driver of activity. A 2017 study from research group CB Insights found that tech investments by non-tech companies were on course to surpass tech companies for the first time. Just over half (51 percent) of Fortune 500 investments into private tech companies came from non-tech corporations in the first half of 2017, up from 29 percent in 2014.

4. M&A remains value-accretive

While 2017 has not matched the heights of the two preceding blockbuster years, the long-term strategic value of M&A transactions remains unquestioned. According to our survey, more than half of the participants estimate that M&A improved their underlying earnings per share (EPS) by between 3 and 4 percent over the past three years. Furthermore, almost three-quarters (72 percent) of respondents say that their EPS was either on target or above target.

Deal dilemmas

1. The China question remains

Respondents were more divided on the impact of the Administration's more protectionist policy aims. Many respondents were concerned about the disruption to long-term trading and economic ties. "The possibility of turbulence in our financial structure is an issue," says the strategy director of a TMT firm. "We're in our comfort zone right now. Any change could adversely affect us."

During his presidential campaign, Donald Trump called for a 45 percent tariff on imported goods from China. However, at the time of writing, such a measure has yet to be implemented.

An imposition of tariffs on Chinese imports would decrease M&A appetite for 47 percent of respondents, with 12 percent saying it would dent their interest in dealmaking significantly. On the other hand, more than half of respondents say that the imposition of tariffs on goods from China would have either no impact on their M&A plans or boost their appetite for deals.

2. The ones that got away

One contributing factor to the fall in overall deal activity in 2017 is the number of deals that have failed to complete. A surprisingly high number—70 percent—of survey respondents say that during the last 24 months, their company had announced a deal that subsequently lapsed before completion.

The perceived increase in lapsed transactions can be attributed to a number of factors. The fact that overall deal value is down suggests that vendors and buyers are less exuberant and thinking more closely about pricing and the strategic rationales for transactions.

Regulatory intervention has also put transactions on ice. China-backed Canyon Bridge Capital Partner's US$1.2 billion bid for Lattice Semiconductor Corporation was blocked by President Trump on CFIUS's recommendation. Meanwhile, the Federal Trade Commission has filed a complaint aimed at stopping chemical producer Tronox from acquiring Cristal's titanium dioxide business. The mega-merger between AT&T and Time Warner is also being challenged in the courts and has yet to close.

The majority of survey respondents cite issues uncovered in due diligence as the predominant reason for their company's most recent withdrawn or lapsed deal. Some 78 percent say problems uncovered in due diligence were the reason for lapsed deals, with 65 percent selecting antitrust regulatory issues as the reason for announced deals ultimately failing.

3. NAFTA hangs in the balance

Withdrawing from the North American Free Trade Agreement (NAFTA) would have a negative impact on US dealmaking, according to our survey.

Over half of respondents indicate a withdrawal from NAFTA would dampen appetite for M&A, including 8 percent who say it would prompt a significant decrease. "Withdrawing from NAFTA will have an effect on trade relations with neighboring countries, and this will impact deals that are in the pipeline," says a corporate development director at a TMT company.

With little progress achieved in the first five rounds of negotiations held with Mexico and Canada—and just two more in the pipeline—concern is mounting surrounding the future of trading links between the three countries. "We have seen no evidence that Canada or Mexico are willing to seriously engage on provisions that will lead to a rebalanced agreement," US Trade Representative Robert Lighthizer said in a statement.

Deal destinations

The top-three US M&A hotspots

Despite concerns surrounding upcoming regulation and political uncertainty, just over two-thirds (67 percent) of respondents say the US will be the most attractive country for acquisitions during the next 12 months, with the next closest candidates—the UK, India and China—registering less than 10 percent each.

Half of those polled say positive economic indicators make their country of choice the most attractive market, while 23 percent cite attractive company valuations and 19 percent choose reliable infrastructure. Strong economic fundamentals within the US explain this attraction. An estimated GDP growth of 2.5 percent in 2017 and 2018 and soaring stock markets have produced a favorable environment for deals.

Despite uncertainty surrounding Brexit trade talks, the UK remains a popular choice for US investors, drawn to attractive valuations and high-quality assets. The US$12 billion acquisition of UK firm Worldpay by US payments processor Vantiv highlights this trend.

Meanwhile, India is emerging as an increasingly attractive deal destination. The country offers strong growth potential to investors. A stable government and an openness to international investment are also draws. A stable government, led by President Narendra Modi, has allowed the economy to prosper and has initiated a wave of investment from international firms.

Charts: survey questions and responses

View full image

View full image

View full image

View full image

View full image

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