Why global M&A is expected to remain healthy into 2020

Diversity in mergers and acquisitions is expected to continue, with trends from 2019 continuing to drive deal activity into next year.

Despite geopolitical fears or the shadow of a slowdown, companies are clearly looking to M&A to navigate current and potential barriers to growth. Indeed, dealmaking is often the fastest route to build the optionality that companies need to proactively respond to evolving challenges.

Mergers and acquisitions intentions still above long-term average

As with the current global economic expansion, this M&A upcycle has lasted far longer than normal cycles, and longer than many predicted. The main reason is that the speed with which companies need to transform their portfolios cannot, in many cases, be done without M&A. At the same time, companies are also using divestments to unlock the capital required for acquisitions. Add to this record levels of dry powder in private capital and all the components of sustained momentum remain in place.

According to the EY Global Capital Confidence Barometer, 52% of respondents are planning to actively pursue M&A in the next 12 months.

Pipeline and closure intentions support a healthy outlook for M&A

Pipelines and deal closures follow a similar pattern to the wider deal market and global economy.

Company pipelines are increasing. This is largely due to the variety of deals being evaluated as companies reinvent business models in response to the changing technological and competitive landscape.

Not surprisingly, with a greater breadth of deal options being evaluated, and valuation levels perceived as challenging, respondents expect a modest decrease in closures over the next 12 months.

M&A focused on talent and technology helps mitigate pressures elsewhere on the corporate agenda

Labor markets are tight, especially for digitally savvy talent, and pressure on existing business models from startups is increasing. Companies are looking to M&A as the fastest routes to get the transitional capabilities that will augment and accelerate their own growth agendas and digital strategy.

Acquiring capabilities and bolt-ons the preferred deal types for most companies

Bolt-ons that complement the existing business and offer an expanded choice of products and services for existing and new customers are also on the corporate radar.

And transformative acquisitions are not to be discounted, although they are rarer. One aspect of dealmaking through 2018 has been the near-record levels of megadeals (US$10b or more). There has also been an elevated number of deals that look to challenge the existing market leaders across many industries. This has led to an increasing number of antitrust and regulatory challenges. However, companies will continue to take on the challenges to acquire a mantle of market leader.

Dealmaking will be a constant source of headlines in the next year but the themes will vary

Many of the trends apparent in 2019 will continue to drive deal markets in the next 12 months. Prominent will be an increasing number of hostile and competitive bids. Private capital funds increasingly flushed with capital will continue to fuel more competitive tension.

The expectations for an increase in cross-border and cross-sector deals is a clear indication that companies will continue to transform their portfolios to build optionality and resilience in their operations.

One area where executives are split is on the continuation of the near-record levels of megadeals (US$10b+). These have been a hallmark of 2019, but executives are split evenly on the continuation of this trend. Megadeals are notoriously difficult to predict, so it will be interesting to see which side is correct.

Western Europe remains the investment focus for many cross-border mergers and acquisitions

Relatively lower valuations and an abundance of high-quality assets make Europe a desirable marketplace for acquisitions. While Europe continues to be the focus for cross-border dealmaking in the near term, the strengthening flows between Europe and Asia, as opposed to the usual Europe-North America axis, is a new trend in global M&A.

With uncertainties about market access and regulatory regimes prominent, companies are looking at the longer-term opportunities. Companies in Asia want to acquire European intellectual property. Companies in Europe want to tap into the more favorable growth and demographics in Asia.