Geopolitical uncertainty and a shifting global landscape will not deter dealmaking in 2017 as US companies confront unprecedented disruption, says EY
New York, 5 December 2016
EY Transaction Advisory Services characterizes 2017 as the year of the ‘Genetically Modified Organization,’ as companies seek to alter their corporate genetics through M&A
M&A is poised for an uptick in 2017 as management teams across sectors are simultaneously pressured to adapt to dramatic market shifts and drive growth in a stunted economy. This, according to EY Transaction Advisory Services, follows a year where companies internalized an “adapt to thrive” mentality in the face of increasing technological disruption, emerging competition and changing consumer preferences.
As a result, US companies will increasingly turn to M&A as a solution, using smaller, tactical deals to supercharge capabilities or competitive advantages and alter corporate genetics. This trend will persist, as nearly all of the US executives planning a transaction in the near term are focused on deals under $1 billion1.
“The year of the ‘genetically modified organization’ encapsulates our expectation that companies will continue to use highly targeted, precision deals to alter their genetic makeup, often at the molecular level, to future-proof their organizations and help innovation keep pace with the rapid change affecting all industries,” said Bill Casey, EY Americas Vice Chair, Transaction Advisory Services. “Executives have an appetite for transformation and diversification and we anticipate 2017’s deal numbers will reflect the need to transact for survival, adaptation and growth.”
According to the EY15th US Capital Confidence Barometer, deal intentions are at an all-time high going into 2017, with 75% of US executives surveyed planning an M&A transaction in the next 12 months, greatly surpassing the long-term average of 45%. Large US public companies have more than $3.0 trillion in firepower to execute on M&A strategies.
Although precision transactions may dominate, megadeals will remain a key strategy for deploying capital, diversifying into new markets, making transformational changes to business models and achieving top-line growth.
“Megadeals are an enduring strategy for inorganic growth, as large companies can quickly broaden their business models by entering new markets with established distribution networks and strong customer bases,” Casey said. “Megadeals will become increasingly complex as companies navigate an ever-changing regulatory landscape, but we are confident management teams will face these hurdles head on to achieve transformational growth.”
The report outlines five key themes for M&A in 2017:
- US to serve as hub for deals despite uncertainty surrounding Donald Trump’s election: Increased political and regulatory uncertainty fueled by the incoming Trump administration may impact dealmaking strategy and approach in the short term. However, EY does not expect these possible uncertainties to outweigh the need for companies to pursue transactions that will drive strategic and transformative growth.
- Megadeals remain key opportunity for US companies to diversify: EY anticipates executives will continue to consider transformational deals (US $5 billion+) as a key route for deploying capital, entering new markets and making large-scale strategic changes to business models.
- Valuation gap will widen as competition remains high: The valuation gap will steadily widen in 2017 amidst intense competition for assets. Sector convergence is also fueling competition, as blurring industry lines drive transaction options for buyers and sellers alike.
- Alliances to provide accelerated path to growth and innovation: Digital disruption and competition has prompted a new avenue to growth through partnerships and joint ventures. Partnerships provide expedience with lower risk, allowing companies to acquire innovative solutions or diversify talent without facing the complexities of complete integration.
- Private equity industry must evolve to deploy dry powder: Dry powder values set a record in 2016, reaching $536 billion with 60% in the US. This will test and demonstrate the agility and the flexibility of the private equity industry, which will shift to focus more heavily on proprietary origination and deep, specific industry expertise.
The report, “The Year of the GMO: Genetically Modified Organization,” provides the aforementioned outlook for 2017, an in-depth perspective on private equity’s role in transactions, and Q&As with EY’s sector leaders representing consumer products and retail, diversified industrial products, financial services, healthcare, life sciences, oil and gas, technology and automotive.
To learn more about what EY predicts for 2017, see here.
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