7 minute read 8 Oct 2018
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Why the M&A market is expected to continue at elevated levels

By Steve Krouskos

EY Global Managing Partner – Business Enablement

Enabling EY to create long-term value. University of Florida alumnus. Son, husband and father of four.

7 minute read 8 Oct 2018

Companies are maintaining strong deal pipelines, signaling only a modest decline in near-term activity, according to our M&A report.

This article is part of our M&A report Global Capital Confidence Barometer, 2nd half 2018.

The strong M&A market is expected to continue as executives predict an improving deal environment…

The momentum in the current M&A market, combined with the compelling rationale to transact, has translated to the strongest outlook for the M&A market in the history of our barometer. There is near unanimity that the deal environment will improve or remain stable over the next 12 months.

What is your perspective on the global economic growth?

...but many believe the action will be elsewhere.

While respondents expect heightened levels of M&A, there is a decline in the percentage that expect to make acquisitions themselves in the next 12 months. We have seen this dichotomy before in our survey. This is an indication that we will likely see a temporary pause in activity. A brief stop to refuel, so to speak.

Given the large number of deals over the past year, many companies will be more focused on the integration of recently acquired assets over the next 12 months. At the same time, companies are actively assessing their portfolio of existing businesses. This will likely result in new inventory of assets coming to market in the next 12 to 24 months, and private equity is a likely buyer for many of these assets.

Most respondents expect to maintain or increase pipelines of opportunities and completions over the next 12 months.

However, pipelines are expected to increase at a lesser rate than 12 months ago. This trend supports the view that the M&A market will remain strong in the medium to long term, despite some short-term softening of activity.

What is your expectation for the global M&A market in the next 12 months?

Entering new markets is an avenue accelerated by dealmaking.

Despite geopolitical worries, global expansion and new market entry is the top reason for pursuing acquisitions.

Interestingly, 26% of respondents now see M&A as a tool to secure supply chains (11%) and respond to unfavorable tariffs and trade barriers (15%). This sentiment has been expected for some time, but is just now starting to materialize as trade regime changes in many geographies appear closer on the horizon. 

Not surprisingly, acquiring the technology and talent necessary to stay ahead of shifting customer preferences also rate as important factors for pursuing deals. 

With tight labor markets across many economies, executives say that acquiring talent has now become a critical component of their M&A strategy.

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Geographic outlook: Trade and tariff uncertainty looks set to underpin cross-border dealmaking.

With global trade and tariff policy becoming more uncertain, companies are planning more cross-border deals to mitigate the potential negative impact on their operations and to secure market access and protect supply chains.

Executives should remain agile in their approach to geopolitical disruption and be prepared to reimagine their global footprint.

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With strong economic growth, the US is at the center of cross-border M&A.

Dealmakers continue to break down borders even as trade barriers are erected. The top M&A destinations of choice are countries embroiled in trade uncertainties, suggesting that those companies planning deals are actively looking to get ahead of potential geopolitical disruption.

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Major themes in M&A

Navigating policy and technology disruption and the rise of private capital continue to be major themes in M&A.

With record levels of dry powder, PE and other sources of private capital are expected to be a major buyer in M&A over the near term. 

Another major theme will be cross-sector deals. As customer pressure compels companies to operate outside of traditional sector boundaries, M&A may be the fastest route for companies to respond to these challenges.

And uncertainty over governmental involvement in the dealmaking process is an emerging challenge. Understanding how to position cross-border deals with regulators and other stakeholders is essential, and also an area that requires planning early in the process.

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New sources of private capital coming on stream will heighten competition for acquisitions. 

As well as traditional private-equity buyers, corporate executives are expecting to see increasing pressure for assets from venture capital, corporate venture capital funds, sovereign wealth funds and family offices.

Private capital is increasingly investing for the medium and long term. They are also returning to the M&A market with significant purchasing power. Corporate executives should be prepared for increased competition for assets — or be open to collaborating with PE on deals, especially when acquired assets may need to be divested to execute the deal.

This should enable corporates to widen the pool of potential buyers on divestments, even though it complicates acquisition strategies on the buy-side.

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The top six sectors most likely to pursue M&A

  • Advanced manufacturing

    • Industry 4.0 is reshaping capital agendas for advanced manufacturing companies. Many companies are shifting from asset-based manufacturing to “manufacturing services” models. This is being driven by the expansion of digital technology in manufacturing and the increased willingness of customers to be served via connected systems (as a service model).
    • Advanced manufacturing companies are continuing to pursue lean operational structures with a focus on core growth segments. Portfolio transformation remains high on the boardroom agenda as manufacturers seek to divest underperforming operations or those at risk of disruption.
    • Deal valuations are still relatively high, supported in part by a fear of missing the digital transformation of manufacturing and competition from PE. While advanced manufacturing companies have an optimistic view of their deal pipelines, they are also prepared to walk away from deals over disagreements in valuations.
    • Cross-border deal activity continues to be elevated despite the recent spike in trade and tariff concerns. Advanced manufacturing companies will continue to look across all markets for innovation and growth potential.
  • Financial services

    • In the banking sector, strategies are shifting to selective growth strategies. Acquisition of new products and technology is high on the agenda. FinTech assets will continue to be highly attractive as financial institutions look for opportunities to collaborate, invest in or acquire innovation companies. Larger deals will come from continuing consolidation within the payments segment.
    • For insurers, portfolio optimization continues to be an active driver of M&A as major players look to simplify and streamline their businesses. At the same time, the need for growth, as well as wider business and sector transformation, is driving large-scale consolidation. Insurtech investments are increasingly seen as a way of accessing and operating in emerging “digital ecosystems.”
    • Wealth and asset management is experiencing a perfect storm of client, technological and regulatory transformation. Wealth and asset managers are looking to broaden their offerings, increase efficiencies and unlock the potential of digital and technology through M&A.
  • Life sciences

    • While the strategic drivers for M&A remain positive, dealmaking has been more muted than anticipated given the 2017 passage of US tax reform. With a few exceptions, large biopharma companies have steered away from megadeals. There is a growing “less is more” attitude, as companies use bolt-on acquisitions to create scale and divest non-core assets.
    • Acquirers are looking to alliances, asset swaps and JVs as lower-risk alternatives to M&A. This is particularly true in the biopharma subsector, where a robust venture financing and IPO climate gives early-stage biotechs with promising pipelines more bargaining power. 
    • PE investors have been active acquirers of life sciences assets, particularly in medtech. Services businesses supporting pharma and specialty clinical laboratories are also attracting much interest. 
    • In 2019, life sciences companies’ aggregate firepower, the financial resources to do M&A, is at an all-time high. This could fuel larger M&A than we have seen recently. Some recent deals have demonstrated that companies are beginning to harness the convergent forces reshaping health care delivery.
  • Mining and metals

    • The mining and metals sector is expected to see a significant rise in M&A activity over the next year. The focus in 2018 is shifting from divestment-led transactions to strategic growth-centered deals. Consolidations for scale and efficiency may also become a critical driver of deals in the sector.
    • With debt levels falling on the back of stronger cash flows and limited appetite for investment, significant capital was returned to shareholders in 2017.
    • Divergence in commodity price performance is expected; miners will diversify by region and commodity to balance portfolios and hedge against revenue fluctuations.
    • The rapid evolution and expected growth of battery technology will attract investment. Priority will be low-risk jurisdictions in North America, Australia and parts of South America.
    • Given the poor returns on capital invested through the previous cycle, shareholders will be scrutinizing acquisition plans closely. The emphasis on capital discipline remains, but miners can be expected to consider JVs and strategic partnerships to mitigate financial risk.
  • Oil and gas

    • Rising oil prices, growth in demand, the stronger financial position of oil companies and improving availability of capital have raised expectations of increased M&A activity in the sector.
    • Elevated oil prices have increased confidence in the oil and gas markets. A sudden spike in oil price, however, may create valuation gaps and dampen deal activity.
    • Consolidation in the US Permian Basin, tax and regulatory reforms in the US and elsewhere, and ongoing restructuring in oilfield services will also create M&A opportunities.
    • Geopolitical risks are intensifying, with the US reimposing sanctions on Iran and continuing trade tensions between the US and China. However, the likely impact on oil and gas dealmaking should be muted.
    • Portfolio optimization continues to remain a major theme driving oil and gas transactions.
    • Companies are holding firm on capital spending limits but are expected to build more optionality into their portfolios and set themselves up for future growth or business transformation.
  • Power and utilities

    • There is greater confidence in the global economy. This is a relief for power and utility (P&U) companies that have experienced lower sales from stagnant growth. That stagnation was due to rising energy efficiency and conservation, as well as distributed generation, leading to downward pressure on revenues.
    • Dealmaking intentions remain at record levels. With a historically low interest-rate environment, there is strong confidence around credit and access to capital, which promotes dealmaking.
    • There is also interest from private equity. Dedicated utility and infrastructure funds have enormous amounts of dry powder for investments, which is driving robust M&A.
    • P&U companies are focusing strategic targets on climate goals in the form of renewables growth and efficient natural-gas-fired generation to tackle intermittency and security of supply, coal-fired generation phase-out and nuclear decommissioning.
    • Companies in the P&U sector are also increasingly exploring new technologies, including battery storage, electric vehicle infrastructure and digital grid technologies, which may accelerate dealmaking in the next year.


Confidence in the M&A market remains near record highs. But trade and tariff issues are compelling some executives to pause their own M&A plans. The top M&A destinations of choice are countries embroiled in trade uncertainties, suggesting that those companies planning deals are actively looking to get ahead of potential geopolitical disruption. The top sectors ready to deal in the next months include advanced manufacturing, financial services, life sciences, mining and metals, oil and gas, and power and utilities. Download the full report (pdf).


About this article

By Steve Krouskos

EY Global Managing Partner – Business Enablement

Enabling EY to create long-term value. University of Florida alumnus. Son, husband and father of four.