M&A activity poised for uptick in second half of 2017 as market fundamentals remain strong, according to EY
New York, 13 June 2017
Despite lingering political uncertainty, dealmaking in the US is poised for an uptick in the second half of 2017, as discussed by participants at an M&A media briefing led by EY Transaction Advisory Services (TAS). Deal pipelines remain strong as management teams prioritize growth and continue to grapple with fundamental, rather than political, disruptive forces that could challenge the status quo for current market leaders.
While US M&A activity in the first half of 2017 remained solid at US$580 billion in deal value year-to-date, this is down slightly from the prior year (3.4%)1. Deal volume is up, however, approximately the same (3.5%), as the market is seeing smaller transactions that are indicative of organizations acquiring new technologies and innovation, helping them capitalize on disruption.
Cross-border dealmaking is also a priority among US companies as they look for opportunities to secure access to markets and supply chains. In fact, US companies have been the most active in pursuing cross-border transactions this year, with $107 billion in announced international acquisitions so far2.
“The pause on larger transactions may be an indication that companies are waiting to see how some policies shake out, however, they won’t wait forever,” said Bill Casey, EY Americas Vice Chair of TAS. “We’re seeing a robust deal pipeline and we believe many of those deals will move by 2018, even if regulatory change is not imminent. We can’t ignore the strong appetite for transactions in late 2016 and early 2017 as companies executed on deals that would fuel growth, even while some regulatory questions remained.”
Business and politics collide, but M&A market remains focused on strong economy
While the intersection of business and politics remains top of mind for many US businesses, historically the M&A market has shown resiliency to geopolitical shocks and macro uncertainty. Policy changes, such as those related to tax reform, trade, immigration and healthcare remain in the public discourse, but they are not expected to dramatically alter the pace of M&A in most sectors. Specifically, while a repatriation of foreign earnings may boost M&A in some sectors like life sciences and technology, the market is not solely reliant on an influx of cash because strong balance sheets, the availability of credit and a pro-business economic sentiment are already driving deal strategy.
Tax reform could make the US more competitive globally and private equity firms in particular are watching for possible interest deductions and cross-border credits to generate returns. Private equity also stands to benefit from potential infrastructure and energy policy changes. For example, the promise of robust infrastructure expansion has led many firms to create infrastructure funds allowing investors to capitalize on the spending and generate returns.
“We will continue to see robust deal activity in the second half of the year, perhaps with an uptick in deals above US $3 billion. With disruptive forces driving change to many business models, PE firms see particular upside in sectors including life sciences, technology and consumer products,” said Bill Stoffel, US Head of Private Equity, Ernst & Young LLP. “Infrastructure is also an area to watch with its impressive levels of fundraising and the US administration’s interest in pushing key projects forward.”
Returning to Core Competencies
At the mid-point of the year, EY sees management teams carefully reviewing their portfolios and refocusing on their companies’ core competencies. Divestitures are expected to increase, especially within technology and healthcare, as these firms address the pressing need to shed noncore assets and deploy capital to fund growth and new technologies.
As companies around the globe continue to face disruption, it is increasingly necessary to free up capital, often through divestitures, to acquire technology and talent that will enable companies to remain relevant and responsive to shifting consumer preferences and emerging competition.
Technological Disruption and Convergence Continues
Sector convergence will also continue to be a primary driver of M&A activity this year as companies look to accelerate innovation and “future proof” their businesses by leveraging the ingenuity of other industries. The technology sector continues to converge with other sectors and blur traditional sector lines, as has been demonstrated frequently in the automotive, healthcare and financial services sectors.
“Sector convergence will play a key role in transactions, fueled by digital disruption and innovation,” said Mr. Casey. “Many companies are not finding an answer on how to stay competitive and relevant within their own industry. They are forced to look beyond what they know into other industries to maximize their potential for growth.”
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1 Dealogic, May 31, 2017
2 Dealogic, May 31, 2017