
Chapter 1
Private equity
Transforming industries through technology, exit strategies
Industries are being transformed by technology and convergence, and private equity firms are helping power this disruption.
“PE firms are putting a great deal of money into legacy companies to add technology, such as cloud capabilities, enhanced customer relationship management systems, financial reporting dashboards and other systems for leveraging data,” Bill Stoffel, EY US Private Equity Leader, said. “They are hiring world-class chief technology officers at companies they own and bringing in chief digital officers at the firm level to improve their online capabilities.”
At the same time, PE firms are helping rewrite the corporate script by creating transformational deals when they sell assets.
“PE is looking further afield as it expands its buyer pool and selling assets to unexpected buyers,” Stoffel said.
Private equity firms have also been building up large war chests, as demonstrated by the increased number of deals in the US$5b to US$10b range and some even above that level.
“Financing has been the enabler for private equity, and that’s going to continue,” Stoffel said. “Terms are very issuer friendly. Covenants have disappeared from most of those deals. Pullback from corporates and banks has enabled PE to become a larger part of the market.” According to S&P’s Leveraged Commentary and Data, covenant-light deals account for roughly four out of every five outstanding leveraged loans in the market today.
Financing has been the enabler for private equity, and that’s going to continue.
Higher valuations are changing the way PE firms look at deals. They now want to transform a business to enable long-term growth and better returns when it is time to sell, rather than looking for cost take outs and a quick exit.
“Multiples are so high, that if there’s not an avenue for change, they don’t want to do these deals,” Stoffel said.
In 2018, average multiples for PE deals were 10.5 times earnings before interest, taxes, depreciation and amortization (EBITDA), according to S&P Leveraged Commentary and Data; this exceeds 2007’s performance of 9.7 times EBITDA.
Private equity multiples
10.5EBIDTA average multiples for PE deals in 2018, exceeding 2007’s performance of 9.7 times EBITDA.

Three PE trends to watch in 2019
Private equity trends to watch for 2019 include: data aiding (or making) decisions; greater emphasis on private capital markets; and megadeals.

Chapter 2
Advanced manufacturing
M&A market pushes through geopolitical uncertainty
Advanced manufacturing companies are using mergers and acquisitions to add technology to their products, find the right talent in tightening labor markets and enter new markets. These driving factors should continue to carry merger and acquisition activity in 2019, despite headwinds from geopolitical uncertainty, including the current trade battle between the US and China and rising interest rates.
Over the past several years, companies in aerospace and defense, chemicals and industrial manufacturing have been both divesting to focus on their core business — sometimes at the behest of activist investors — and buying core strategic assets divested by others. They have also been making acquisitions outside of the sector to add technological innovation as they try to meet customer demand for a more services-led approach.
Geopolitical forces are also impacting manufacturing M&A. In our most recent CCB report, 48% of manufacturing executives surveyed listed regulation and political uncertainty as the biggest risks to dealmaking. This uncertainty includes tariffs on key inputs like steel.
Companies in the sector are showing signs of committing more to using mergers and acquisitions as a means of transformation, says David Gale, EY Global Advanced Manufacturing Leader, Transaction Advisory Services.
In this way, these companies have been rewriting the script to enable sustainable growth in an uncertain, technology-driven future. We would expect these trends to continue and funnel down from the largest to small and medium-sized companies.
“In the next six months we might see some larger breakups,” said Gale. “This will create opportunities for others in the market to acquire what the larger companies divest.”
At the same time, talent is becoming more of a focus. With a tighter labor market, manufacturers will rely on acqui-hires to bring in a skilled workforce, and companies with higher functioning workforces could become attractive targets for the workers themselves.
In the next six months we might see some larger breakups. This will create opportunities for others in the market to acquire what the larger companies divest.
Valuations are also rising as private equity firms, with a great deal of cash to deploy, bid for assets. At the same time, rising interest rates are increasing costs for companies looking to finance acquisitions with debt.
But while these headwinds could slow the M&A pace on the margins, we expect the driving forces of technology, industry convergence, deployable cash, and a push to focus on and build core businesses to drive continued dealmaking.
“There is geopolitical concern, but you keep moving forward. Companies know they need to innovate to drive long-term growth,” Gale said.

Three advanced manufacturing trends to watch in 2019
Advanced manufacturing trends to watch for 2019 include: technology influencing deals; middle market taking up the next phase; and geopolitical change and expansion.

Chapter 3
Consumer products and retail
Challenging legacy companies with new technology and business models
Consumer products and retail companies are turning to mergers and acquisitions to help spur growth through both traditional deals and smaller investments that provide the chance to experiment with new technologies and business models.
In some cases, activist investors are driving deals for scale and cost efficiency. In others, companies are carefully examining their portfolios and divesting non-core assets. Expansion into new geographies also continues to be a priority.
These trends are likely to continue as companies balance technological disruption with increasing demands by consumers for personalized products, experiences and convenience.
All companies are facing disruption, but the key is their willingness and ability to adopt new business models or adapt traditional value creation models. Many of these companies are protecting their legacy, and it is challenging for them to disrupt themselves.
Consumer industry companies are rewriting their future by acquiring fast-growing startup brands, securing new technology that allows them to more nimbly respond to and connect with consumers, and focusing on product and experience.
“This is a challenging environment for CPG (consumer packaged goods) companies,” Johnson said. “Relationships with retailers make launching a direct-to-consumer brand or acquiring one more difficult.”
But CPG companies also need to be highly strategic in their integrations. Moving too quickly may alienate loyal consumers, and slowing it down could mean losing the critical benefits of synergies.
The key for consumer industry companies in 2019 will be what steps they are taking to profit from disruption.

Three consumer trends to watch in 2019
Consumer trends to watch for 2019 include: technology, health and ethical M&A.

Chapter 4
Financial services
US market ripe for M&A driven by quest for technology, scale
The outlook for mergers and acquisitions in the US financial services industry looks healthy heading into 2019. Regional banks and asset managers continue to look for scale and regulations ease, while innovation, technology and customer expectations continue to disrupt business models in insurance and consumer-facing financial services.
Less stringent criteria for what constitutes a systemically important financial institution (SIFI) leaves room for larger banking deals. At the same time, tax reform has given financial institutions more flexibility to deploy capital towards acquisitions and investments in technology.
“The financial services industry is bullish on M&A, and US companies are even more confident than what we are seeing globally,” Nadine Mirchandani, EY Americas Financial Services Leader, Transaction Advisory Services, said.
The financial services industry is bullish on M&A, and US companies are even more confident than what we are seeing globally.
On the consumer side, financial services companies are embracing technology to enable new ways of making payments, investing, giving wealth advice and offering loans. On the wholesale side, technologies like blockchain may have the capability to transform transactions, settlement and clearance services.
“There’s a good chance that the future of consumer financial services could be vastly disrupted by customer-oriented platforms, and the wholesale part of financial services could be disrupted by alternative means of transaction processing,” Mirchandani said.
Data strategies are also evolving as financial services companies leverage data to help transform their business. Mergers and acquisitions are being used to not only acquire clients, market share and product reach but also scale talent capabilities in areas of technology, data, science and engineering.
“The discussion we have with clients is about the pace of change,” Mirchandani said. “The buy part of the buy-versus-build equation is winning because building a capability may take too long.”

Three financial services trends to watch in 2019
Financial services trends to watch for 2019 include: financial services where and when in life you want them; leveraging data; and increase in online and digital models.

Chapter 5
Life sciences
Financial firepower to invest amid industry convergence
Life sciences companies head into 2019 with the financial ability to use M&A in niche and transformative deals in an industry where scientific and technological advances create new opportunities for more personalized medicine.
EY analysis suggests US tax reform and funds captured from divestitures have boosted the cash available for acquisitions. But life sciences companies remain cautious because of increasing trade tensions and uncertainty around regulation and pending legislation.
“Companies have the firepower to do deals, but they aren’t deploying it,” Ambar Boodhoo, EY Americas Life Sciences Transactions Leader, said.
Meanwhile, the industry story is rapidly changing. Digital health and technology entrants are moving from fitness monitoring to disease management, potentially encroaching on traditional life sciences markets. Additionally, the consolidation of different health stakeholders, such as payers and drug store operators, underscores just how quickly the drug supply chain is transforming.
In recent years, this convergence has accelerated, highlighting the growing importance of technological collaborations. As the volume and variety of health data increase and with a greater need for process efficiencies, companies recognize the growing importance of artificial intelligence (AI), robotics and automation, cloud computing, IoT, and blockchain. Indeed, major pharma companies are collaborating with tech players to leverage these solutions across the value chain.
“Value will come to those who can produce innovative health outcomes tailored to individuals, with a high degree of precision and personalization,” Boodhoo said.
Value will come to those who can produce innovative health outcomes tailored to individuals, with a high degree of precision and personalization.
Digital acquisitions are clearly an important part of companies’ strategy, and in our latest Digital Deal Economy Study, 60% of life sciences respondents said they were looking at M&A, joint ventures and alliances for digital growth.
In 2019, we expect companies will continue to review and enhance their portfolios, narrowing their focus and divesting non-core assets.
As certainty emerges around trade and regulation, look for life sciences companies to deploy their financial firepower to enhance their care in a personalized, digital world.

Three life sciences trends to watch in 2019
Life sciences trends to watch for 2019 include: disruption, preparation for digital future and precision medicine.

Chapter 6
Media and entertainment
Owning key capabilities and buying scale
Media and entertainment (M&E) companies head into 2019 focused on M&A to acquire key customer relationships, technological capabilities, content and scale.
2018 was highlighted by megadeals that either were announced (Disney-Fox, Comcast-Sky) or that cleared a major legal hurdle (AT&T-Time Warner). These deals are emblematic of M&E using transformative mergers and acquisitions to gain more direct access to customers (and their data) and to acquire content to fill new platforms.
We expect that trend to continue in 2019, with mid-tier and smaller companies feeling pressure to transact.
“Unless they have a truly unique niche that is sustainable, they will have to partner up,” John Harrison, EY Global Media & Entertainment Sector Leader, said. “Fortunately, at least in some areas, companies are divesting assets to achieve regulatory approval for a deal or as part of regular business portfolio reviews, creating incremental opportunities for buyers.”
The M&E sector was among the earliest to feel the disruption that comes from convergence, with competitors from technology and telecoms producing content and delivering it directly to consumers. The sector leaders now realize the importance of acquiring technology to launch direct-to-consumer (over-the-top) platforms and investing in advertising technology to deliver targeted, compelling advertising experiences. M&E companies are also experimenting with how AI may be used to automate portions of both the creative and “green-light” decision-making process.
“If it’s a capability that is truly strategic to future growth, companies are going to be more inclined to own the process and underlying technology,” Harrison said.
If it’s a capability that is truly strategic to future growth, companies are going to be more inclined to own the process and underlying technology.
At the same time, major global acquisitions face more regulatory scrutiny. The US government has appealed the ruling that allowed the AT&T-Time Warner deal to proceed, while trade tensions with China are causing uncertainty.
One thing is certain from our discussion with clients — they want to make sure they have the right capital structure in place to capitalize on opportunity.
“Clients want to avoid becoming strategically isolated as others consolidate around them,” Harrison said. “They don’t want to miss the window.”

Three media and entertainment trends to watch in 2019
M&E trends to watch for 2019 include: shifting landscape; content evolving to meet consumer needs; and convergence in overdrive.

Chapter 7
Technology
Transformative deals should keep driving tech M&A
The technology sector is seeing record M&A valuations, driven by PE investors continuing to double down on the sector, and the biggest technology companies looking to grow, expand and reshape their capabilities. Corporates, from outside the sector, are also attempting to secure their futures by adding key tech capabilities through mergers and acquisitions.
We anticipate the major factors that have driven M&A, including disruptive forces and pent-up demand, will likely continue to drive transformative deals as large companies update their portfolios.
Consolidation is occurring across the market, most notably in cybersecurity and semiconductors. In the former, the market is buoyed by new entrants and increasing focus at the board level, while customers would prefer to work with fewer security vendors. In the latter, portfolios require reshaping into faster growing segments such as IoT and automotive, while cost economics require ever-increasing scale.
Technology-focused PE investors continue their ever-increasing interest in the sector and are adding to the competition for assets, helping to drive up valuations.
“Tech is still in the middle innings of the latest cycle of innovation. Digital is not only disrupting the sector, but also forcing companies across industries to acquire technology assets to ensure future growth,” said Barak Ravid, Managing Director of EY-Parthenon and Co-head of the Technology practice. “As the tech titans mature and grapple with slowing organic revenue growth, we expect more divestitures of non-core assets and big, bold acquisitions. Non-tech acquirers are responding to the urgency of digital transformation with the fastest route available — M&A.”
Non-tech acquirers are responding to the urgency of digital transformation with the fastest route available — M&A.
Despite the long-term factors that are driving mergers and acquisitions in and around technology, executives are being more cautious about M&A in the near term. This sentiment may be reflected in the number of tech deals announced; tech sector M&A volume was up 1% year-to-date, according to 451 Research. However, the technology deals being announced have been big, with aggregate deal value up 54%.
“Technology companies are looking closely at their portfolios, and they see the need for continued consolidation to seize new opportunities and to be the disruptors instead of the disrupted,” Ravid said.

Three technology trends to watch in 2019
Tech trends to watch for 2019 include: looking outside the US; tech-focused PE forcing out competition; and buying instead of building to gain tech skills.
Summary
Fueled by strong economic fundamentals and continued sector convergence, US dealmaking should remain strong into 2019, despite geopolitical tensions. All businesses should be aware of the top US M&A sector trends to watch in private equity, advanced manufacturing; consumer products and retail; financial services; life sciences; media and entertainment; and technology.