Global merger and acquisition activity surged in the first nine months of 2018 to record levels, outshining the previous high reached on the eve of the financial crash just over a decade ago. Positive global growth, strengthening balance sheets, investor support and CEO confidence all contributed to the boost in M&A activity, while the industry-wide need for technological innovation and an accelerating rate of digital disruption encouraged leaders to act with urgency.
Driven largely by “megadeals” of which thirty were announced within the first six months of the year, the global M&A market remained strong in the first half of 2018. Notable deals include IBM’s purchase of open-source software provider Red Hat for $34 billion, Comcast’s acquisition of Sky television network at £30.6bn and Japanese pharmaceutical maker Takeda, who acquired Shire at £45.6bn as a means to seize the competitive edge and expand their business.
Nevertheless, against a backdrop of geopolitical uncertainty and regulatory change, the global M&A market inevitably surrendered to caution as the year came to a close. With an average deal value of £2.9bn and an aggregate deal value of £122.1bn recorded at the year’s end, 2018 was a mixed bag for M&A.
As we make headway into 2019, insecurity surrounding the ongoing US–China trade dispute and the ticking time-bomb that is Brexit threatens to cause further deceleration in the market. In their recent report on global M&A activity, JPMorgan Chase recently said that the megadeals behind the M&A boom in the last five years could see a slow down because of the prolonged trade war and increasing regulatory red tape.
Yet, figures from a recent study from consultancy giant Deloitte tell a different story, with a surprising 76 percent of M&A executives from US-headquartered corporations and 87 percent of M&A leaders at domestic private equity firms expecting the number of deals their organisations close over the next year to increase. What’s more, their findings revealed the recurring sentiment that the size of those transactions will be larger than the ones brokered in 2018—with seven in 10 respondents saying they anticipate bigger deals.
Brexit comes to a head
The UK’s impending departure from the EU has undoubtedly had an effect on the UK’s deal market, and yet investment in the lower-mid market has remained healthy. Nevertheless, fewer than one in four respondents to Deloitte’s survey on prospective overseas M&A activity picked the UK as a likely target for deals in 2019 as a direct reflection of the uncertainty surrounding Brexit. Of course, with the terms of our exit still up in the air, it’s difficult to see through the cloud of political fog to better understand how corporations will respond.
In the event that we do leave with a favourable deal, an uptick of deals is to be expected as uncertainty subsides and the dust settles on the new trade landscape. Of course, a chaotic cliff-edge Brexit (which still isn’t off the table) will likely have the opposite effect – for buyers or sellers with international trade agreements, contending with a raft of operational challenges will take priority for management in the short-term while M&A takes a back seat.
Yet, with current predictions pointing towards a highly active and resilient private equity market in 2019, the year ahead could still make for a good time to sell a strong business. Sitting on large pools of unspent capital, investors are under pressure to deploy that capital. In turn, private equity firms hungrily hunt for high-potential businesses that will generate a healthy return for investors.
Cross-sector convergence continues to impact M&A strategy
In 2018, sector convergence into the tech industry hits a 10-year high as more companies entered the race for innovation. In the words of Clarence Mitchell, EY Global TMT Strategy Leader: “There’s hardly a company left that doesn’t think technology is going to be core to their ability to succeed in the marketplace.”
In EY’s recent survey, 31% of executives cited “disruptive forces” as the greatest near-term risk to the growth of their business, and many of these disruptions relate directly to new technologies. For these organisations, M&A provides an opportunity to respond to shifting customer demands, innovate production capabilities, acquire digital talent and gain access to new markets.
According to Deloitte’s report, the general feeling amongst respondents was a decrease in the number of tech firms involved in transactions in 2019, though their data did show a sharp rise in the number of respondents predicting convergence between manufacturing and technology as advances in AI, automation, robotics and IoT begin to transform supply chains across the globe as part of the fourth industrial revolution. Yet, other areas for convergence were less obvious – the pairing of banking and securities with energy and resources, and to some extent, the combination of technology and asset management.
At a time characterised by fast-paced technological development, we can expect major industry convergence to impact M&A strategies and deals throughout 2019 as the desire among buyers to deepen digital expertise grows.
Schemes of arrangement remain the structure of choice
Schemes of arrangement are still the most popular structure among bidders – that’s according to research from LexisNexis, whose report reveals that of the 42 firm offers announced in 2018, 31 (74%) were structured as schemes and 11 (26%) were structured as offers.
Court-approved schemes of arrangement (or “schemes of reconstruction”) are attractive for several reasons – first and foremost, the certainty a bidder gets of obtaining complete control. Once approved by the court, the scheme will be legally binding on all the target’s shareholders. In turn, the bidder will gain 100% ownership at an earlier stage than they would in an offer.
Two corporate transactions of 2018 saw the bidder switch from a scheme of agreement structure to an offer – the first being Fox’s offer for Sky and the second being the bid made by DBAY Advisors on Harvey Nash. In the case of Fox, the change was prompted by the arrival of Comcast’s competing bid, whereas for DBAY, concerns that an an insufficient number of independent shareholders would approve the scheme triggered the switch.
Switching has historically been rare in the M&A market, but with 75% of offers now being carried out by an agreement scheme and an increase in shareholder activism, the coming year may see more bidders change structure to fend off competition and counter opposition to a bid.
At a time of major industry convergence, political uncertainty and technological innovation, deal value creation is more critical than ever – of course, creating deal value in M&A is a challenge in itself. With acquisition prices set to rise and new regulations coming into force, deals are growing increasingly expensive in a fast-moving landscape.
Looking into 2019, there are a few things that executives should consider before diving headfirst into a deal – perhaps most importantly, understanding where their current business is, their position in the market and the trends of other sectors that could impact their business.
Equally as crucial is the need for companies to evaluate their financial capacity for M&A and determine whether their organisation is in a comfortable enough place to take a sudden injection of growth. Beyond financial capacity, the importance of having the right leadership team to take the M&A forward and integrate the acquired or partner company. Without a strong senior management team to ensure the success of a deal, the transaction poses a dangerous risk.