Global M&A Activity Soars in First Half of 2018

“In the first six months of 2018, worldwide mergers and acquisitions volume shot up by 60 percent compared to the first half of 2017, reaching $2.5 trillion,” said Jeremy Swan, managing principal, financial sponsors industry for CohnReznick. “In the midst of a strong and highly liquid market in both equity and debt, the total for 2018 could reach $5 trillion, and that’s despite uncertainties over trade, tariffs, and interest rates.

“Much of the growth came from mega deals, which hit levels not seen since 2007. Some 38 percent of global M&A deals were of $10 billion or more, and almost 50 percent were deals of $5 billion or greater.”

Swan also said that the first half also saw intense activity between countries, as cross-border deals made up 40 percent of total volume, despite a large drop in Chinese purchases of U.S. assets.

Much of the activity has been driven by strategic buyers, who often can outbid private equity buyers. “That said, we have seen a steady increase in the percent of deals closed by financial sponsors globally,” said Swan. “That’s a trend we expect to continue, because we have close to $1 trillion available globally that financial sponsors need to put to work.”

Notably, while mega-deals dominated, another 40 percent of volume was driven by deals of $25 million or less. “This leaves a very small component in the middle market, where we haven’t seen a lot of activity,” said Swan., “That’s a big change from the past several years which, featured a high level of mid-market action.”

The greatest M&A activity occurred in three industries: media/entertainment, health care, and telecom. In these markets, “large companies are seeking to acquire more growth, more vertical integration, and more technology,” said Swan. “They are expanding into new industries and new geographies.”

“Companies also are acquiring smaller companies to add technical or executive talent,” said Elizabeth Sanders, chief counsel, transactions/M&A at Panasonic.

“The passage last year of the Tax Cuts and Jobs Act, which lowered the corporate tax rate to 21 percent from 35 percent, among other changes, has helped the M&A market,” said Jeff Marks, managing director, corporate finance advisory at J.P. Morgan. “It feels like the U.S. is much more competitive on a global basis in terms of tax policy, with the caveat that there are wild cards that may not be tax-related.”

The most notable wild cards are tariffs and trade wars that are ratcheting upward. “It’s harder and harder to do strategic transactions in a global market where supply chains are as integrated as they are, and you can’t figure out what you’re going to pay within your own company for business services, said Marks.”

“The U.S. tax law changes also influence how to structure deals,” said Sanders. “Consider whether it makes more sense to create a C corporation or a pass-through, for example. Other changes include how to value intangible assets and the allowable uses of net operating losses.

“In today’s competitive market, M&A is part data and part art. Obviously, the right data and proper analysis of it is critical. But just as important is understanding the dynamics and culture of an acquisition target, especially if it’s a family-owned business.

“You need to manage their expectations, so they understand the way a larger company operates. And the key to that is consistent and frequent communication. A good communications strategy builds support for these changes, particularly the changes in corporate culture.”

For more information, experience the webinar, M&A Activity in 2018: What Are We Seeing and Why?