Whether it is the major audit firms or investment banks or the most well-known financial markets, it would seem that they are all on the same wavelength: this year 2018 has an unprecedented number of deals and seems to be continuing on the same trajectory.
Surprisingly, as globalization has become more and more prevalent over the years, it appears after consulting the various opinions of the largest M&A and Private Equity (PE) institutions that the biggest deals will always take place in the most developed economies and not in emerging countries (excluding China).
Despite a pleasing start to the year for the announced M&A operations, which for the first half of 2018 represent $2500 billion1, up from $2300 billion in 2007, it must be noted that the various events in Europe or the United States and China – trade war, attack & rescue of Italia Telefonica by activist funds, delayed increase in interest rates between the FED and the ECB, the impact of a possible Brexit that is taking a long time to take shape, etc. – are all factors that have an impact on the success of the M&A operations. – raise some doubts about the strength of financial markets in the medium term.
That being said, the fall in markets in February was presented by experts as a correction related to the upward trend of 2017. This correction has made it possible to recover the volatility lost on the markets and we can now see that it has been filled without being able to make any significant increase. The stagnation of market prices reflects the atmosphere of uncertainty in which investors find themselves, given the events mentioned in the previous paragraph.
Private Equity still profitable….
Macro events have not yet affected the Private Equity (PE) market in the first quarter of 2018, it seems, since EY is seeing an increase in deal closings worldwide in the first quarter of 2018 compared to the first quarter of 2017.
Source: EY Q1 2018 PE report
This good performance can be attributed to last year’s exceptional capital raising, where PE funds attracted more than $640 billion, which required the capital raised to be used. However, the first figures for the second quarter seem less promising for Europe with a general decline in deal closures over the same period attributed to the political instability faced by some countries, such as England and Italy.
Notwithstanding this mixed view and given the uncertainties in the financial markets, more and more analysts are recommending that the equity portfolio be reduced to switch to alternative management where certain types of hedge funds perform better than traditional funds in a bearish market.
These recommendations are supported by the EY study which reveals that 55% of existing private equity funds will this year seek to create a new fund with, for 60% of them, the certainty that this fund will raise more capital than the current funds.
If current macro instabilities persist or even worsen, then the recession feared by some economists may come true, which will most certainly lead to a disinvestment of some of the capital invested in financial markets into private markets.
And ever-larger M&A deals….
According to Bain & Capital but also JP Morgan & Chase, the most prominent M&A sectors today are in the healthcare (Pharmaceuticals & Healthcare), technology (Technology, Media&Telecommunication) and consumer (Consumer & Retail) sectors.
This trend in the above-mentioned sectors is reflected in the activities of large groups that are now increasingly aggressive in their acquisition policies, such as Philips through its Accelerate plan to acquire various companies mainly in the health sector, just as General Electrics is divesting2 the sphere of railway equipment and lighting manufacturing to also focus on the health sector.
Beyond these companies, we are seeing the emergence of increasingly important mega-deals such as the acquisition of Shire by Takeda for nearly $77 billion, the acquisition of Script Holdings by Cigna for $68 billion or the battle between Comcast and Disney to acquire 21st Century Fox, which is currently rising, given the latest offer made by Disney, to $80 billion.
This type of operation is likely to intensify even more since the judgment handed down in the United States last June on the United States vs. AT&T case, where the judge considered that AT&T’s acquisition of Warner Time did not constitute a violation of anti-trust rules.
Cash-rich groups that are reluctant to launch large-scale M&A transactions at the risk of being pinned by the Department of Justice (DoJ) or the Securities Exchange Commission (SEC) will certainly move to the left, supported even more by very particular shareholders referred to in JP Morgan&Chase’s report: activists.
This echoes Deloitte’s report on the issue of M&A deals, which reports that 65% of the companies surveyed by their study want to use their cash to undertake M&A transactions compared to 58% the previous year. This study shows that corporates will tend to rely more on external growth than organic growth to create growth.
The year 2018 looks promising both in terms of the number of M&A deals and their importance, but also in terms of PE deals, despite somewhat battered financial markets.
Several things seem to be emerging: first of all, the disappointing performance of equity markets influenced by macro elements which, if the trend continues in this direction, will see the capital of financial markets move towards private markets, on which PE funds, and more broadly hedge funds, operate.
Secondly, the trend seems to be converging towards a clear desire to acquire already mature companies, which have significant multiples and no longer mainly start-ups as could have been done in the past – with a few exceptions, such as the Fintech sector. The reasons for this are linked to a more uncertain economic climate, which does not favour risk-taking, high availability and regionalisation of deals.
Indeed, intercontinental deals seem, in general, to be slowing down and one may wonder whether there is not a desire for protectionism in view of the current international political climate.
As a result, if the deals are large, then it is likely that the synergy effects will be greater and particular attention will be paid to the quality of due diligence to best estimate the potential goodwill to be paid.
Overall, the M&A and PE sectors seem to have a bright future ahead of them despite an economic situation that remains tense and a market in full transformation.
AGEFI HEBDO N°621 du 5 juillet 2018, p.26-27
The Economist, p.58, November 18TH-24TH 2017 issue (General Electrics)
1 AGEFI Hebdo n°621 du 5 juillet 2018, p.26
2 A hauteur de $20 milliards d’ici 2020