The M&A market has transformed over the past 30 years. Before the market as we now know it began to take shape, deals were largely domestic, typically between trade buyers, with transaction sizes small and the use of debt largely absent.
Today’s deals could not be more different, with global, cross-border mega deals often involving financial buyers and large amounts of debt, which helped to take the value of global M&A deals in the first quarter of 2018 to over $1tn. Trends are already emerging that will accelerate the further development of the M&A market and will also help shape the type of corporate finance advisers that will flourish in the years to come.
A key factor in the M&A market’s evolution was the targeting, in the 1980s, of undervalued businesses by specialist financial and M&A houses, seeking to drive efficiencies and improve performance. As the size of their deals increased, so did their need for funding, which prompted the rise of leveraged buyouts. Probably the era’s most high-profile deal was the $31.1bn takeover of US conglomerate RJR Nabisco by investment firm KKR, which held the record as the largest LBO in history for over 17 years.
In the 1990s, globalisation led to a rise in cross-border deals of increasing size and involving ever larger amounts of debt. The decade recorded nine out of 10 of the biggest ever deals, including Vodafone’s $172bn acquisition of Mannesmann. All this helped worldwide M&A volume reach over $3tn in 2000. The new millennium began with the announcement of a record-setting $165bn Time Warner and AOL merger and signaling how tech and online business were starting to play a key role in deals.
Going forward, a raft of key trends and factors will drive the further evolution of the M&A arena.
Tech M&A is very likely to accelerate, with TMT M&A activity in the first quarter up by about 90% to £134bn. The sector has seen some of the biggest deals in M&A history in recent years, such as the $19.5bn acquisition of Whatsapp by Facebook. Factors that are likely to further increase deal flow are the strategic shift made by tech companies, such as Google and Amazon, to move beyond their core products, private equity houses taking a stronger interest in tech businesses, the some $470bn big US tech companies have in repatriated cash following the Trump tax reforms and older economy companies buying innovation, such as General Motors’ acquisition of self-driving car start-up Cruise.
Private equity houses, flush with funds, are only likely to sharpen their appetite. Deal value, involving buyout firms totaled $467bn last year. An abundance of debt was a key factor in this. Debt financing caught the headlines earlier this year when it was announced that Blackstone Group was negotiating a jumbo $13bn debt package for its potential acquisition of a 55% stake in Thomson Reuters’ Financial and Risk unit. With interest rates only rising gradually and liquidity still abundant globally, debt is likely to continue to play a key feature in the market’s mega deals.
Another key trend that will likely shape M&A is the rise of shareholder activism causing an increase in divestments. Europe particularly has seen a surge in divestment activity, reaching $169.2bn last year. Recently, 80% of experts surveyed by Mergermarket believed that shareholder activism will increase M&A activity in the coming 12 months.
In the mid-market, the outlook is also bright. In the US, for example, the number of mid-market deals increased by 14% last year and a survey by a specialist US M&A house revealed an increase to 22% from 17% in the number of executives that are 100% certain they will pursue deals in 2018.
Even in the UK M&A looks likely to prosper, despite fears of a temporary uncertainty surrounding Brexit. In the first quarter of this year, M&A activity involving British companies rose to $275bn (£196bn) – its highest volume since the turn of the century – according to figures by Reuters. Certainly the increasing appetite of the serial entrepreneur, encouraged by low capital taxes is matched by the willingness of UK domestic entrepreneurs to exit while the market is good and before the cloud of a potential change in government starts to dominate the landscape.
Meanwhile, with companies still chasing geographical expansion, and China outbound activity remaining strong, cross-border M&A deals are only likely to accelerate. Last year there were more than 9,000 deals with a total value of some $1tn. Such cross-border deals increased by 33% in the first quarter of 2018, according to Deloitte.
There is concern that deals might be stalled by a more protectionist environment, with stricter scrutiny in the US and other countries such as Germany tightening their foreign investment rules, partly to protect sensitive technologies. The EU is also looking at harmonising its foreign investment rules too. However, internationally companies’ commercial imperatives of acquiring new IP, markets and customers will likely trump such considerations with regard to overall deal flow.
Thirty years ago it would have been difficult to imagine such a market, but it is change that spurs further growth. All the signs are that M&A is set to remain as busy as it ever has.
This article first appeared in Financial News