This article has been written by TBL Associate Editor, Rayan Bhattacharya.
2018 has witnessed M&A deal values ascend significantly with an estimated figure of USD 2 trillion being announced in the first half of the year itself. These notable figures, which can be justifiably termed to be of “pre-financial crisis” levels, are often both outcomes and indicators of various global political and economic trends that influence cross-border business.
While the overall value of deals throughout the year has soared, the total number deals have been slightly lesser than that of the previous few months of the past year. This, however, was counter-balanced by relatively higher valuations of the same, with many high-value deals being closed in the last few months of the year. Large multinationals, especially US-based ones, on one hand, have taken bold strategic moves over the months, while small and medium-sized businesses globally have acted cautiously by attempting to fully gauge the risks their respective local political and economic circumstances might potentially pose to them. Major factors of such nature in the past year have included the US-China trade war, Brexit and currency related fluctuations in many cases.
The volume and value of deals, however, witnessed an 18% dip in the third quarter of 2018. In line with the overall M&A dip, private equity and venture capital deal making also declined in Q3, with only 5747 deals worth USD 173,444 being closed, as opposed to 6479 deals worth USD 257,925 in Q2. The dip in deals, however, did not deter the value as all the top three deals broke the USD 6000 million barrier. The USD 6900 million deal involving CC Capital Partners, Cannae Holdings and Thomas H Lee Partners agreeing to pick up the US-based Dun & Bradstreet marked the largest PE and VC deal completed in Q3.
Best Performing Sectors and Sources of Risk
In terms of crucial sectors in M&A, data, and other tech-based M&A continues to be a major driver of deals. This can be evidenced in the Chinese data heavyweights Tencent an Alibaba announcing various domestic and international joint ventures in attempt to leverage their data capabilities.
While the US dominated the rankings in terms of number of deals, major Chinese investments into the US in many cases have come to a halt due to political tensions. Trump’s outlook of treating economic security equivalent to national security has galvanised the pursuit of economic protectionism, due to which various major deals have fallen victim to foreign and trade policy complications. This began with stricter scrutiny being imposed onto deals by the CFIUS, followed by the US’ Foreign Investment Risk Review Modernisation Act (FIRRMA) taking its toll on bidders. The failure of the Qualcomm-NXP deal due to delays in securing merger control clearance became the first major deal to be outright affected due to the political and economic policy hostilities.
However, it would be unfair to say that such high-value transactions are restricted to only one jurisdiction. Major tech deals throughout the year had targeted companies from India, Italy, Germany, and Israel. The 16-billion-dollar acquisition of 77% of Indian e-commerce giant Flipkart’s stake by Wal-Mart in August marked the highest value overseas acquisition of an Indian company by an overseas one to date.
Another sector that witnessed notable deal movement was the hospitality sector. Over 18 major deals were announced in 2018, with AccorHotels taking the lead by announcing four major acquisitions with deals for 21c Museum Hotels, Mövenpick Hotels & Resorts, Atton Hoteles and a 50% stake deal in SBE Entertainment. The Asian hospitality sector too made notable moves in 2018, with InterContinental Hotels Group picking up Regent Hotels & Resorts from the Taiwanese Formosa International Hotels Corporation in March. Furthermore, August witnessed Chinese hotel giant Jin Jiang International Holdings buying Radisson Hospitability’s Chinese holdings from the HNA Tourism Group.
Region-Wise Developments in M&A
The vibrancy of 2018’s M&A market can be evidenced across continents and major regions. European M&A values also matched pre-financial crisis levels at USD 610 billion. While the UK and Germany retained their spot as top hotspots for deal-making, political and legal uncertainty surrounding Brexit and Germany’s shifting stances on FDI pose threats to investments in the coming year. Investor confidence is seen to be returning in Africa as the region is in transition from economic recession. Middle East-based M&A is relatively slow compared to global standards but traditional industries such as petrochemicals have continued seeing deal-making.
While in-bound investment into Latin America is not strong, regional M&A has been relatively strong throughout the year. The former can be credited to the air of political uncertainty in major jurisdictions such as Brazil, Mexico and Argentina. In spite of the prevailing uncertainties, the energy sector has still seen some movement, with the TMT and Healthcare sector systematically picking up as well.
Forecasts for 2019
Despite the largely well-received numbers of 2018, analysts at multiple major investment banks have forecasted a degree of uncertainty and turbulence for the M&A market. Surveys from EY have revealed that only 46% of senior company officials have deals planned in the coming 12 months, down from last year’s 56%. However, the initial turbulence does not ,fortunately, imply stagnation. Regions like the Asia-Pacific are estimated to witness continued deal-making as it is a solution to the region’s slowing economic growth in certain jurisdictions.
Hence, a slowing growth of emerging markets, technological disruption, and high levels of dry powder and healthy liquidity will promote M&A activity in the coming year. These deal galvanising factors have to be weighed against the threats posed by global foreign and trade policies and the uncertainties they might pose to businesses globally and the impact they might have on each quarter of 2019.