Forecast favourable for M&A in 2018

February 2018  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

February 2018 Issue

Although 2017’s economic and geopolitical landscape erected additional hurdles for deal makers to clear, they were not insurmountable and the year ultimately proved to be a lucrative one for M&A. 2018, according to forecasts, is shaping up in much the same way.

Indeed, according to an October 2017 report by Baker McKenzie and Oxford Economics – ‘Global Transactions Forecast 2018: Deal Appetite Rising’ – global deal makers are regaining their appetite for transactions amid the easing of key economic and political risks and the emergence of positive macroeconomic deal drivers.

Drilling down, the analysis forecasts that global M&A will rise to a peak of $3.2 trillion in 2018 (an upward revision of 6.7 percent on initial predictions of $3 trillion), with IPO value improving by more than 50 percent year-on-year to nearly $290bn. “We have a more optimistic outlook for deal making in 2018, as long as the brakes are not put any further on global free trade,” says Paul Rawlinson, global chair of Baker McKenzie. “We forecast an increase in both M&A and IPO activity as deal makers and investors gain greater confidence in the business prospects of acquisition targets and newly-listed businesses.”

Painting a similarly upbeat picture are the latest forecasts from the International Monetary Fund (IMF). In its October 2017 World Economic Outlook report ‘Seeking Sustainable Growth: Short-Term Recovery, Long-Term Challenges’ the IMF predicts that global economic growth will rise to 3.7 percent in 2018, with M&A activity a major beneficiary of the global upswing.

Key trends

According to David Jorgenson, chief executive of Equiteq, deal flow in 2018 will be supported by continued low interest rates and large pools of capital available for acquisitions among both strategic buyers and private equity investors.

“In the services sector, for example, demand for M&A is being driven by digital disruption, changing client demands and the search for growth among prolific strategic buyers,” says Mr Jorgenson. “We are also continuing to observe convergence between adjacent segments and demand from many trade buyers for further global expansion to service the demands of their large international clients.”

Another key trend expected to impact M&A in 2018 centres on how companies adjust to ever-changing consumer habits. “How we access data, media, consumer products and services has changed dramatically over recent years with the increasing introduction of technology,” says Jonathan Klonowski, research editor EMEA at Mergermarket. “This has been a key driver behind M&A in recent years and is expected to continue as corporates look to get a step ahead of competition.”

Sectors and jurisdictions

In terms of M&A as it pertains to high activity sectors and industries, key jurisdictions, deal size, deal value and cross-border transactions, among other things, the Baker McKenzie and Oxford Economics report notes that deal makers, while remaining cautious, are approaching potential M&A activity in 2018 with a fair measure of confidence.

“Those firms that offer high-value capabilities at the intersection of technology, media and traditional business consulting will be in particularly high demand over the next year,” suggests Mr Jorgenson. “We are also seeing notable buyer interest for companies offering process transformation services to life science manufacturers and healthcare providers trying to reduce costs and demonstrate value. Business services firms are benefiting from life science, payer and provider demand for help with regulatory shifts.”

Also foreseen in 2018 is a strong demand for disruptive capabilities like digital strategy, advanced data analytics, artificial intelligence (AI), Internet of Things (IoT), augmented reality, as well as cloud services and cyber security.

“As we enter a new age of technology, of which very few sectors are immune, the need to acquire and keep pace has rarely been greater,” says Mr Klonowski. “The rise of IoT, passing through to Software-as-a-Service (SaaS), AI and self-driving cars, means companies will aim for ‘first-mover advantage’ to get ahead of rivals. A further point of interest will be whether big-ticket Chinese outbound deals, which were key in shaping record levels of M&A in 2015 and 2016, return. Interest in Western companies remains strong and resurgence in outbound acquisitions in sectors approved by Beijing could have yet another influencing effect.”

2018 deal flow landscape

Despite the robust M&A deal activity forecast for 2018 by Baker McKenzie and Oxford Economics in their report, the analysis also makes clear that this uptick in deal making will be short-lived, with a more challenging environment set to take its place in 2019 and beyond.

According to the report, a range of factors will cool deal activity from 2019 onwards, particularly in developed markets, including higher interest rates, a cyclical easing in global trade and investment growth, and a correction in equity prices back towards fundamentals. Overall, the report forecasts M&A values dropping to $2.9 trillion in 2019 and $2.4 trillion in 2020.

That said, that is then and this is now, with 2018 poised to be a banner year for M&A transactions.

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Fraser Tennant